IDENTIFYING INDIVIDUAL GOALS

The initial step in controlling risk is to identify the goal or goals that an investment program is designed to achieve. It may seem unlikely that a rational person will invest funds when no specific motives have been identified. Investments can be made only at the expense of reducing current consumption, and few find pleasure in giving up many of life’s pleasures. The truth is that individuals all too frequently acquire investments without really defining what it is that they expect the investments to accomplish. Identifying goals is crucial to establishing an intelligent investment program, because an individual’s goals play a major role in determining the risks that can be tolerated and, hence, the kinds of investment assets that should be acquired. For example, if achieving a particular goal is deemed to be absolutely crucial, then certain restrictions apply to the investments that are to be acquired in pursuit of the goal. The same limitations may be less important or even irrelevant when the achievement of a goal is desirable but not really critical.