Lesson 5: What should your investment goals be?

 

In this lesson, well answer the questions: why is it important to have goals? How can you come up with them? And why is it important to think longer-term and also be realistic?

We will also look at some useful stats throughout history that can help us choose our goals and also discuss why over time, our investing goals can change.

Why is it important?

To our first question, why is it important to have goals, and specifically why is it important to have investment goals? Well, setting investing goals can benefit us by providing clarity to our investing journey; it can offer motivation and of course, create a clear plan for us all to follow.

You might be thinking, is there actually any theory to back up setting goals in investing? It is all well and good saying we should do it, but is there proof that it is worth doing? Of course there is!

A 1979 study by and of MBA students is one such instance that is frequently cited. Only 3% of the graduating class had written goals and plans for achieving them, 13% had unwritten goals, and 84% had none at all.

The students with unwritten ambitions were making, on average, twice as much money after ten years as the ones with no goals at all. The small proportion of students who had defined goals made 10 times as much money as all other students put together.

You arent alone if youve ever thought investing sounds hard, nerve-wracking or tough to do, but hopefully these classes can help you feel more confident; also by setting goals, you can realise your investing journey and how to get there.

Coming up with goals

But how do we come up with our goals?

Ever heard of SMART goals? SMART stands for Specific, Measurable, Achievable, Relevant and Time-Bound. Lets look at an example where SMART goals could be applied to your investing.

Lets say youre someone who can afford to invest ?200 a month, you might say I want to have ?40,000 in my investment account in 10 years time which I can put towards a new house It is very specific, it is measurable because we have a clear amount we are after, it is achievable based on what we already know about compound interest, it is relevant to what we need and it also has a clear time period on the goal.

Of course, this is just one example, but it does show how SMART goals can really help and give you the motivation to see your efforts through.

Ask yourself why?

So ask yourself, why am I investing? Is it for a house? Is it for my retirement? Is it for a better quality of life? Determine your why and create goals to go along with it.

To help determine the why, you can write down each investing goal you have (on paper or digitally, up to you), along with a description of how you plan to track your progress. Consider both short-term and long-term goals while creating a detailed list. Assume that in addition to saving for retirement, you may also want to buy a house in a desirable area and have some money left over for the occasional trip. Review your present financial condition now, taking note of how well youve managed your finances thus far and the actions youre prepared to take to accomplish that list of objectives.

That could mean saving more, investing more, being more risk averse, being more diversified or even taking more risk. Again, make sure you have a clear plan and goals to follow.

Thinking long term

Now lets answer the question, why it is important to think longer-term? Remember from the previous class where we said markets generally go up over time but timing the market in the short term is really tricky? Well that is why it is important to have a long-term plan.

We all would love to become multi-millionaires overnight, retire early and drive off into the sunset but in reality that is incredibly unlikely to happen. However, by regularly investing, being patient, reinvesting your returns and being disciplined in your approach to investing, you help increase the chances of growing your investments.

So what could be some long-term goals? You might say, I want to make on average 10% a year over the next 20/30 years. Is this realistic? Well the US Stock Market makes 10% a year on average so in theory, if you just invested in that then you have a good chance. Or you might say, I want to make a certain amount of money in a certain amount of time. Goals should be personal and your goals that you might think of right now could be very different to someone elses. Some people with children may say, I want to give all my children a certain amount of money when I retire that they can put towards their first house. Lets say that number is 50 grand and they have 3 children. They can then work out how much money they would have to invest per month and for how long based on the average returns they are after.

Now, it is important to highlight that just having goals, doesnt mean you will necessarily achieve them. While this may sound a bit pessimistic, that is just of course the reality of things.

Using the past to determine our goals

How can we use history and stats to make realistic goals?

We have already covered what the average stock market return is, so there is already a good base to go from. We can use that 10% average return to help calculate how much we could make in 5, 10, 15, 20 years and so on. As we always say, past performance isnt indicative of future results but it can help us have a guide.

In our last lesson, we looked at three different types of portfolios, one that was riskier, one that was more balanced and one that was cautious in comparison. The stats of each of these can also help us plan our investment goals. If you are early in your investing career you may favour the riskier approach to try and build wealth but as we get closer to retirement we might focus on maintaining it instead.

Changing and adapting your goals along the way

As mentioned at the beginning of the lesson, your goals can change over time and there is absolutely nothing wrong with that.

In order to achieve a certain longer-term goal, someone might need a bigger percentage of their portfolio in stocks due to the higher volatility. Stocks in general have higher returns than bonds throughout a market cycle which typically lasts 7 years (more on that in future lessons). For instance, a 35-year-old investor might have 80% or even more of their portfolio in equities, depending on their circumstances and the state of the market. That age group could probably handle the heightened stock volatility.

However, if someones goal is shorter-term the investor could probably assume less market risk, especially if their goal is less than a complete market cycle away to reduce the likelihood that the stocks will see a significant decrease around the time when the investor would need to convert their investments into cash. An equity/stock allocation of just 20/30% may be more beneficial for someone who will rely on their investment portfolio during retirement.

These are just a couple of examples, but you can see how someones goals will change depending on their age or where they are or what they want from life.

Hopefully, this class has helped you understand why having investing goals is beneficial and also helped you figure out what your investing goals could be. Its important to craft them to you personally, to make them realistic but also, to not be afraid to change and adapt them along the way.

In our next lesson, we will focus on how to choose what to invest in

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