Individuals differ greatly in their return needs. If you depend on your investment portfolio for part of your annual income, for example, you will want returns that emphasize relatively higher annual payouts that tend to be consistent each year and protect principal.
On the other hand, individuals who are saving for a future event—a child's education, a house, or retirement, for instance—would want returns that tend to emphasize growth. Of course, many individuals may want a blending of the two—some current income, but also some growth.
Determining your return needs is important because you can't have all of everything—there is no investment that offers a high certain payout each year, protects your principal and offers a high potential for future growth.
There are a number of trade-offs here, based on the risk/return trade-off. First, the price for principal protection is lower returns, usually in the form of lower annual income. There is also a trade-off between income and growth: The more certain the annual payment, the less risky the investment, and therefore the lower the potential return in the form of growth.
These trade-offs can be seen by looking at examples of individual securities from least risky to most risky:
Again, these securities are mentioned only as examples of return characteristics to help you identify your own needs. Individuals with specific return needs will not necessarily invest exclusively in securities with those same characteristics. Diversifying among different types of securities in the proper proportion will still allow you to meet your return needs, as long as you have identified them properly.
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