5.2.  Investment Goals

Though many different factors should be considered when determining what investments to recommend to a customer, there are some basics to follow when defining investors and investments. First of all, how you invest your money is driven primarily by what you need the money for. Do you need it to buy groceries tomorrow? Do you need it for a down-payment on a house in the next five years? Or do you want to save it for retirement or for a trust for your future grandchildren? Knowing this can help you assess risk tolerance, and risk tolerance, in the world of securities and investing, is all about volatility and time horizon. How big are the swings you are willing to tolerate? If you need the money for groceries tomorrow, you can’t afford any swings in the value of your portfolio, and you should have your money in cash. But if you’re saving to buy a house in five years or saving 30 years for retirement … you get the idea. So when talking to customers, a fundamental question is, when do you want to access the money you have invested?

Different customers have different investment goals, and recommendations should change depending on their goals. Four common goals are the following: capital preservation, capital appreciation, income, and speculation. Capital preservation means you don’t want to lose your money. Safety first. Capital appreciation means growth, the dream of all investors. You want your investments to increase in value over time. If you are an income investor, you want regular returns in cash (interest, dividends, and other distributions). If you are a speculator, you are willing to risk losing it all for the opportunity to win big. Speculators may have a short- or long-term time horizon, but the defining feature of a speculative investor is that she is willing to take great risk for the possibility of great gain. Viva Las Vegas!

On the exam, expect situational questions that require you to understand the risks asso