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  • Writer's pictureSahastha

Goal Based Investing

Updated: Oct 4, 2023

The way we invest money makes a difference. Hence as a beginner, it is essential to ask the right questions before starting to invest. One of the critical questions that must be asked and answered is, “why are you investing the money”? A quick answer to the question is to make more money. But there is a better answer. I read it in one of the books. It is a one-liner that explains the need for investment beautifully. ‘Invest money to have the right amount of funds at the time of need.’ Here need is the financial goal.

Goal based investing differs from traditional investing, in that its yardstick for success is how well the investor is able to meet his or her personal life goals, rather than how well his or her investments perform against the market average in a given period. Goal based investing re-frames success, based on ones’ needs and goals.

Plan out your financial goals

First, you need to know your various financial goals which you wish to achieve over various time periods. Then you need to figure out the time you have in hand to reach those goals. Once you are clear about these two, goal and the time frame, work out the present cost of each of these goals. Some of the common financial goals that you may need to plan could be Retirement, Children’s education and marriage, Savings for vacation, Vehicle or Home purchase in short to medium term, tax savings and Regular cash-flows / income planning.

Make a priority list

Once you have your financial goals laid out. This is the time when one should start listing the priorities of life. These are such priorities that are mainly capital intensive. Putting your goals on a priority list is important because it will determine your investing style. Consider an investor who is looking forward to retirement within a year, and who therefore cannot afford to lose even 10% of his or her portfolio. If the stock market plunges 30% in a given year and the investor’s portfolio is down “only” 20%, the fact that the portfolio has outperformed the market by 10 percentage points would offer scant comfort. That investor needs to focus more on maintaining, rather than growing, wealth in order to reach his or her personal goal of affording retirement within a year. As an example, the asset allocation for the retirement assets might be 10% equities and 90% fixed-income, while the asset allocation for the education fund may be 50% equities and 50% fixed-income. Individual needs and goals, rather than risk tolerance, are what drive investing decisions made under the goal-based framework.

The advantages of goal-based investing include:

  1. Clients’ increased commitment to their life goals by allowing them to observe and participate in tangible progress.

  2. A reduction in impulsive decision-making and overreaction, based on market fluctuations.

Bottom line

Goal-based investing has grown in popularity in the years after the Great Recession of 2008–09 as investors realized the extent to which chasing high returns could negatively impact long-term wealth accumulation. Millions of hapless investors witnessed their net worth plunge dramatically, in correlation with declines across nearly all major markets. Before investing your dime anywhere else, it is better to identify financial goals. Goal based investing has its advantages. It helps us to invest our money more responsibly. Furthermore, such investments stay put for a longer time thereby, yielding compounding returns. Fixing financial goals and making investments accordingly, will always keep you in control of your actions. Market movements will not scare you. You will never be confused about your decisions.

Practicing goal based investment will make you more skillful and scuttle.

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