Every investor wants to make money, but your personal goals will probably depend on things like your age, lifestyle, career, and how much risk you’re comfortable with. An investor without goals is a bit like a car with no destination. You can start driving, but until you know where you’re going, you won’t know which way to steer.
It’s important to have goals because:
- Setting goals will form the basis of your investment plan
- It’s easier to choose investments and make investment decisions when you have goals
- Having defined goals will help you know whether you’re on track or not
What does an investment goal look like?
Investment goals should be clear and measurable. Ideally, try and put a number against your goal, and add time frames so you can start to plan out your investment horizon. Write down your goals so you can plan and track them more easily.
|Example goal||Amount||When I want to achieve it|
|New car||$15,000||3 years|
|House deposit||$150,000||6-8 years|
Be realistic about your goals. They should be things that you could reasonably achieve without having a significant negative impact on your current lifestyle. One way to assess this is to break down a larger goal into smaller chunks. If you want to save $10,000 in a year, how much will you need to save or earn every week to get there?
Look at your short-term and long-term goals together to see whether they’re compatible. If your goal for retirement is overambitious, you might be sacrificing shorter-term goals (like education or renovating your house) for the sake of the long-term goal.
How are you going to reach your investment goal?
Investments can generate returns in two ways: growth and income. Your goals might impact what type of return you want to earn, which in turn can affect the type of investments you choose.
For example, if your goal is to buy investments that will provide an income for you in the near future, you might choose shares in companies that you believe are likely to pay higher dividends. But if your goal is to gradually build wealth over a longer investment horizon, you might look into stocks that have a lower dividend yield but a higher potential for growth.
When do you want to achieve your investment goal?
Timeframes are important because they’ll often determine how much risk you’re comfortable with. Even if a market is trending upwards over a long period, it’s probably going to go through short-term ups and downs.
So if you want to achieve your goal in the short term, you might prefer lower-risk investments that provide lower returns but are generally more stable (and less likely to be affected by market fluctuations). This is where the role of ETFs comes into things.
If your goal is longer-term you might look into higher-risk investments that provide the opportunity for higher returns. That way if the market falls, you can wait for a recovery rather than being forced to sell when prices are low.
How much can you afford to invest in your goal?
When you’re setting investment goals, think about your budget and be realistic about how much you’re comfortable investing. Remember that investment returns aren’t guaranteed, and if your investing goals are long-term, you might need to leave money “locked away” in investments for a period of time. If you’re likely to need an amount of money in the near future, it might not be the best idea to invest that money right now (or you might choose asset classes with higher liquidity so it’ll be easier to sell them in a pinch).
Leave some wiggle room
Life happens. Nobody can plan for everything, and most of us will need to adjust our goals at some stage. So leave a little room for flexibility with your goals, and remember that you might need to adapt them in the future. Check in with yourself from time to time and ask yourself whether your goals are still guiding you in the right direction.
- Your goals will form the basis of your investment strategy.
- A goal might include the amount of money you want to accumulate and a timeframe (e.g. $15,000 in 3 years).
- The goals you set will affect your risk tolerance and the types of investments you choose.
- Write down your goals and reflect on them regularly.
Learn about the foundations of Investing in ETFs in the next chapter.
Head back to the Ultimate Guide to ETFs
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Original article published 2018 at CommSec.com.au. Republished with permission.