Last time, I asked you to set up some helpful investment goals. We ended the discussion by handing you a pencil and paper to start drawing up your investment goals. Now, before you start doing that, ask yourself some questions to help clarify some implicit assumptions many of us make.
Btw. You should read this ONLY if you want to stay in 100% control of your finances and investment decisions. If you want Walt to take care of everything and not bother you with headache inducing details, you can skip all of it. Walt would ask you all that he needs to know about you to help you set the right financial goals and investments for you.
WHY IS IT NEEDED?
As we discussed, parameters involved in your goals change from time to time depending on countless factors. The goal you were saving for, is the target still the same? Has your overall financial health remained unchanged since we last planned things? Have your expenses gone up? Are you married now?
There are a lot of factors, each contributing a tiny bit of change. Tiny, but not insignificant. And that is why asking these questions becomes not just important, but crucial.
#Q 1. If you are looking for financial independence, what is your required number?
Do you understand the concept of passive income? This is how Wikipedia defines passive income.
Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.
The concept of passive income, as you would find on most reference sites, is typically focused on US citizens and those influenced by the taxation laws and regulations of the IRS. But, actually this definition is true and applicable for everyone — irrespective of where they are.
If your goal is financial independence or financial sustainability, you are essentially looking at arriving a place in your life where you no longer need to work in order to take care of your financial requirements. Most people think of it as their retirement fund or strategy, but it is actually much better for you if you plan it as a passive income.
Consider investments — be it into assets (like real estate), or the financial markets. If you are able to achieve a point wherein the monthly returns from your assets (dividends on stocks, rental income from real estate etc.) offset your monthly expenses, you have achieved financial independence. You no longer ‘need’ to work to add more money to your portfolio because your monthly needs are being well taken care of, while keeping your original portfolio size intact.
What should your portfolio size look like for that to happen? How much passive income are you targeting? Are you factoring in the obvious additional expenses — say travel, entertainment etc? These questions matter.
#Q2. What is your risk tolerance? — Or — How much of a risk appetite do you have?
We are all hardwired differently. Some people prefer their food spicy, some like it completely bland. The way we look at investments is no different. While some of us would not mind the risks that come associated with an investment stream (as long as the potential reward is alluring enough to offset the said risk), there would be others who would want to keep the associated risks to a bare minimum, and they would be willing to earn relatively smaller amounts of returns for that tradeoff.
There is nothing wrong with either set. But you do need to be honest with yourself. Don’t set financial goals based on what others are doing. Set your financial goals while being aware of who you are. If the slightest market fluctuations can result in an emotional turmoil for you, the potential rewards may not be worth countless sleepless nights.
#Q 3. What is the time horizon you are targeting?
What good is money if it isn’t accessible, right? One of the biggest problems with the general and mass perception about investments is the ‘requirement’ to lock it in for a relatively longer period of time.
PPFs — which was all the rage 20 years back — needed your money to be locked in for 10 whole years. Can you believe that?
The first popular mutual funds needed your money locked away for 5–7 years. Even today, most of the tax saving investment options necessitate your money locked for 5 years.
I had some spare cash. But before I could think of investing it anywhere, I had just one thought. Liquidity! I wasn’t sure if I would be needing that money the next day or after a year, but I knew I would soon — anytime between tomorrow and three years. So, I wanted to be in a position where if needed, I can withdraw any or all of that money.
Liquidity + time horizon matters.
No matter how lucrative an investment opportunity may be, if you feel that it won’t be able to give you the liquidity at a time when you would ideally want it to, stay out. As I said, what good is money that isn’t accessible.
Return to cash or cash equivalents — you always need to factor that in.
#Q 4. What kind of a person are you?
If you want your investments to be hassle-free and non-strenuous, align them to your personality. My grandpa loves and understands real estate, so he chooses to invest in land and properties only. I, on the other hand, understand stock market well and am willing to take the risk, so that is more cup of tea. If I were to ever venture out in real estate or my grandpa in stocks, it would be a headache for both of us. I would, in all probability, hire an asset manager who would take care of my real estate holdings; thereby, losing control over how I invest my money. Sure I would be investing the money, and getting the returns, but I would be flying blind — relying on whatever info my asset manager would be passing on to me.
Stick to who you are as a person.
Now, these are just a few of the questions you need to ask yourself, and they are all important. You could also ask yourself questions like where do you want to invest, are you fine with investing in a mix of portfolio — real estate, stocks, commodities, options and futures.
Spending time with these questions, before setting up your financial goals would be time well spent. Get the answers right in the beginning. That would help you set the right goals and make calculated decisions towards your financial objectives. Things tend to get much easier when done the right way.
ღღ THE SHORT AND CRISPY VERSION ღღ
To formulate the right financial goals, ask yourself some critical questions that would help you put in place the right set of goals.#1. If you are looking at financial independence, what is the target output per month to achieve that?#2. What does your risk appetite look like? or How risk averse are you?#3. What is the time horizon you have in mind to achieve your goals?#4. What kind of a person are you? Make sure your investment philosophy is aligned to your personality type.