Every person has some goals in life. Without goals and ambitions, you are just a rudderless ship, a wandering psychopath. You can’t get far in life without any goals and action plans. Boredom, depression, fear, anger, and frustration may step in, and you are ought to get lost somewhere in the busy world as a wanderer. Goals and ambitions keep us busy, occupied, and enthused. You get up every morning with an urge to reach your goals, impelled to pursue your desires, and to derive the pleasure in fulfilling those desires. Everything I said above holds good for you as an investor too. As an investor, you should have some investment objectives. Without an investment objective, you are ought to spend recklessly without the intention of even saving a dime, whatever income you may have. Without an investment objective, you are happy with whatever income you have; you won’t be even thinking of improving your income year on year or about creating multiple income streams. So as an ideal human being and as an ideal investor, you should have some investment objectives. Do you have an investment objective so far? If yes, what is your investment objective? If you are beginning your career, what should be your primary investment objective?
An investor without investment objectives is like a traveler without a destination. -Ralph Seger
Before getting into what should be your primary investment objective, what is an investment objective?
According to the financial dictionary,
An investment objective is a financial goal that helps determine the type of investments you make. For example, if you want a source of regular income, you might select a portfolio of high-rated bonds and dividend-paying stocks.
So, you invest your savings (the idle money) to compound and achieve a goal. Unless you fix a target amount and an objective to utilize that amount, you are bound to waste your earnings/savings spending for less important things.
Investment objectives and time available differ from person to person depending on his/her age. Presume that you are a youngster just beginning your career, hence a small investor. (Many of my young friends are directionless at that age!) So what should be the primary objective of an investment portfolio of this small investor?
The basic human needs for life being food, clothes, and shelter, you have the means to get the first two needs once you start earning. Only the third necessity has become a distant dream for any youngster since the turn of this century. Real estate prices have rocketed but the value of money has plummeted due to inflation, and in turn your earnings are not sufficient to buy a home, sometimes even with your lifetime income!
According to the recent International Housing Affordability Survey conducted by Demographia, there are places where you can afford to have an urban home with merely 2.3 years of family income. However, in some places where it is severely unaffordable, one can’t even buy a home with lifetime income! (The most affordable markets being in the United States and Canada.)
When I bought a home at my place back in 2005, it cost me 1.5 million bucks in my currency, approximately 2-1/2 years of my family income. Now with the prices shooting up, the same house costs 5-6 million bucks where as my family income is still stagnant or has come down and the value of money too has decreased due to inflation. In that scenario with real estate prices spiraling and inflation eating into the income, it made sense buying the home on mortgage. Hadn’t I bought a home then, now at 42, owning a home would have become an unfulfilled lifetime dream!
Along with inflation if the real estate prices are increasing at your place, it would be ideal buying a house even by borrowing. Interest outgo will be compensated or outvalued by inflation and increase in real estate prices and cost of building materials. Else, if the real estate prices are stagnant or dwindling with low inflation (1 to 2%), it will be ideal to compound your money by investing in cash equivalent instruments, and then reaching the goal of owning a home.
Conclusion: Owning a home, the basic human need that has become severely unaffordable nowadays even with years and years of income, should be the primary investment objective of the portfolio of a young, small investor who is beginning his career.
I agree that real estate should be one of the primary investments. Instead of investing into someone else’s companies, why not invest into your own life. However, market timing is also very important. If I was in 2006-2007 in USA and purchased a house, I would not be a very happy person right now, seeing the value of my investment significantly go down. So, even a small investor, needs to understand some basic economic mechanisms and get expert opinions about whether right now is the best time to buy a house.
Please note that no expert is that genius to perfectly time the market. I would rather take into consideration two points before buying a home.
Once everything is through, I would never turn back and look at the value of my home whether it has appreciated or not as if someone would look at the stock market ticker every minute! I would rather enjoy the ownership of the home. It is for consumption. Only if one buys a home with mortgage, he has to worry about the value of his home going down and/or his repayment amount/tenure going up.
I don’t think one need to know rocket science for just these basics.