Know the terrain — Dissecting investment goals
The key identifiers of great investment goals. Understand them well to tread on the right path.
The only thing wrong with the way we invest our money for purposes related to ‘tax relief’ is the goal with which it is done — To save taxes.
“Saving taxes” is the icing on the cake, it isn’t really a goal. But since the investment advisors keep on harping about that point, we have been going about it wrong. The goal, in most cases, is to maximise wealth. The constraint is blocked off assets for anything between 3 to 10 years — depending on the investment route you take. Unfortunately, there are only three broad investment goals that we see around ourselves today:
- Tax saving
- Saving up for downpayment on a home purchase
There are many more, and I tried to expose you to some of such goals in the previous article —
Here, we are going to take a relatively deeper dive into understanding investment goals.
WHY SETTING INVESTMENT GOALS IS IMPORTANT?
It helps you keep a close eye on where you have been in past, where you are at present, and where you would be in future. Goals become important because they pertain to your personal finances, and hopefully lead you to the state of financial independence.
WHAT MAKES AN INVESTMENT GOAL “GOOD OR BAD”?
The simplest answer is simplicity and clarity.
Your investment goals should be simple enough to track, monitor, analyse and most importantly, prevent you from losing focus. And they should be clear enough for you to strategise effectively. For example, “Saving money for buying a new house” is a good goal to have. That goal, however, would have been much more clearer and better had you crafted it as “Saving Rs. 25 lacs in 3 years for downpayment on the new house”. How much? For what? By when? The new goal answers all three questions. The previous one just answered the What. And unless you have all datapoints, you can’t really make any intelligent strategies around it.
Therefore, your investment goals should have the following three traits:
#1. They should be measurable
Clear. Concise. Definite.
Our last goal was that. If you know how much you need to save, and by when, you would know where to invest your money, and how much to invest to achieve that goal.
Another way of representing that goal (and a better route, for anyone just starting earning a payslip) could have been:
Saving Rs. 10,000 per month towards downpayment of a home purchase (in 5 years).
As your capability to invest in this goal increases, you can change the figure from Rs. 10,000 to Rs. 15,000 and so on.
Why this matters?
- You can continuously monitor your targets vs what you are actually investing to understand whether you need to reduce your goal.
- If you are being left with surplus cash month-on-month, you would know that you are capable of increasing the figure further.
On the other hand, a bad goal would have looked something like this:
I will start saving for a home purchase this year
Why? Because the goal is vague, and so there is no accountability associated with it. It becomes something like a New Year’s resolution, and we all know how most of them turn out.
Take this example. Almost 8 weeks back, I set a personal goal for myself. A simple goal — At least 6 times in a week, before 9:30AM, I had to write an article on Medium, and answer a question on Quora. My friend followed suit — a week later — with the goal that he would also start writing on Medium, soon. Since then, I have written 60+ articles on Medium and have answered as many Quora questions. My friend is yet to begin.
Accountability. It makes a lot of difference.
#2. They should be reasonable and rational
Take the example of the goals we set earlier.
Saving Rs. 25 lacs in 3 years for downpayment on the new house
Saving Rs. 10,000 per month towards downpayment of a home purchase (in 5 years)
They do not indicate the same goal, with the only difference being in their representation. They are altogether different goals.
In all likelihood, you won’t be able to save Rs. 25,00,000 in 3 years (or even 5 years) if you are putting in just Rs. 10,000 a month. Unless there is a major unexpected, unprecedented change in market conditions in your favor, or you increase the amount you are putting in, Rs. 10,000 a month would probably fetch you between Rs. 8,00,000 — Rs. 12,00,000, at the end of 5 years.
So, you need to be rational and sensible in setting up your goals.
If you have never lifted a cricket bat in your life, you should not be having the goal of hitting a double century in your first match. It is as simple as that.
So, break things down a bit. Convert your investment goals into multiple achievable milestones. After all, you don’t want to get demotivated by the lack of progress, do you? And those will be fairly commonplace in the initial stages.
Start out small, with a reasonable monthly goal, and invest just that small amount. Then, while you do this, evaluate and re-evaluate your financial standing to see if you can start look for ways to find more money to invest. It could be by better management of your finances, it could be by cutting down on expenses wherever possible. It could also be by adding an additional revenue stream in the mix. Gradually keep on increasing your portfolio size — one baby step at a time.
This will make the goal much more manageable, and you’ll set yourself up for success.
Bringing the writing example back in the picture, I have always wanted to publish a series of mini-books. On startups and different aspects and facets of it. I could have made that my goal. But no. Let’s start small. And then gradually scale things up. Don’t aim too high too soon. Keep your eye on the prize, but gradually work towards it.
#3. They should be aligned with your broader objectives in life
Despite the fact that many of us are chasing money day in and out, what you need to realise is that money is not the only thing that matters. Sure it is important, but it is important because it is tool that exists to serve you — make your life better, give you the experiences that make you happy, add value and utility to your life. Those — the things that money helps you do — they are the things that really matter. Money is just a means to an end.
And that is the philosophy that you need to ingrain in all your investments. Why? Because those things give you a sense of satisfaction, happiness and gratification. So when your investments would help you in achieving those broader objectives, you would feel more driven towards achieving your next set of objectives. And this, in turn, will make you even better in how you manage and plan your future investments. Because, it will all seem worth it.
Why do I highlight it? Because I would never advise you to cut corners to save as much as you can. Sure, you should invest, but not at the cost of enjoying your life. You don’t want to look back at your youth with a lot of money, but even more missed experiences and opportunities.
So how do you ensure you are enjoying life, but saving for the long-term objectives as well? By balancing your short-term happiness and long-term happiness. Some small sacrifices today for long-term happiness is both acceptable and fine, but don’t stop enjoying life altogether. Find a balance.
Don’t worry if you don’t get it right right away. You will get better at it with time. Just start trying to balance it today, and then we will work on improving that balance in time.
PRO TIP: As you start investing, focus on keeping things simple. Don’t charter into unknown territory; start with something you have an understanding of. Your focus at this stage should be on creating some quick small wins to boost your confidence. And while you find these small successes, research up on the more complex instruments to invest in and gradually branch out.
Alright then. So now that you know how you should go about setting your financial goals, get a pencil out, grab a piece of paper and start charting things out!
THE SHORT AND CRISPY VERSION
Always have goals - be it in life, or your investments. Goals help you stay focussed, give your investments a sense of purpose, keeps things aligned. Having goals would also mean that you won't be flying blind anymore. Instead, you would be aware of the direction you need to take, and also be able to evaluate if you need to do some correction in your course at any stage. Without goals, you would be like a ship lost at sea.
There are three basic things you need to keep in mind while making investment goals:#1. Your goals should be concrete, crisp and clear. In one word, measurable.#2. They should be reasonable and rational. Just because you make your goal to be like Hercules and move mountains, won't make it so. So, be reasonable in setting your goals.#3. They should be aligned to your broader objectives in life. If one of the things you want to do in life is to complete the Ironman Triathlon, one of your goals in near future would be to start getting fitter, more athletic, with more stamina. Start aligning your short term goals with your long term ones.