How Achievable Are Your Financial Goals?

Published: May 30, 2013 at 6:39 am

Last Updated on January 31, 2021

‘How much risk an investor can take’ and ‘how much risk he should take’ are two very different things. ‘Invest as per your risk appetite’ is half-decent advice. However it is not universally valid. A person who hates equity can choose to avoid it only if he can afford to regularly invest a sizable (often impractical) amount of money for long term goals. A person who loves equity cannot invest in it if his goal is only a couple of years away. The investors risk appetite is relevant only when the goals risk appetite is also accounted for.

The goals risk appetite determines the risk the investor should take while the investor risk appetite determines the risk the investor can take. A goals risk appetite can simply be represented by estimating the return needed with the following inputs

  • How much the investor can invest
  • How long the investor has for the investment to grow
  • A reasonably close estimate of how much is needed.

Some background is necessary to put this post in perspective. This post is the 4th in a series on long term goal-based investing:

  • Part I listed in detail the steps needed for goal-based investing and included a calculator to determine the return needed for one goal.
  • Part II dealt with the importance of rebalancing when accumulating a corpus. It came with a rebalancing simulator with historical Sensex and FD returns to drive home the point.
  • Part III dealt with consolidating and optimizing all financial goals. A way to minimize the total amount required for investing by treating all goals to be funded from a single portfolio was described with a calculator.
  • Part IV, which is the current post, also deals with consolidation and optimization of all financial goals. Here too we shall assume all goals to be funded from a single portfolio and determine the return required to accomplish all goals with the total amount we can spare each month as the input.
how achievable are your financial goals?
Photo Credit: Erix (Flickr)

The idea of a single portfolio is briefly explained here. More details can be found in part III. The amount we can afford to invest for all our financial goals (excluding PF or NPS contribution) is assumed to be invested each month from now until retirement. As the corpus grows we take out what we want from it as and when required for all goals except retirement. When we are ready to retire, the final value of the corpus is (ideally) equal to the retirement corpus needed for a financially independent retirement. The idea then is to determine the return required. From this, given the debt allocation and estimated (conservative) post-tax debt return, the equity return required is estimated.


When return is determined:

  • The amount we can invest is an input. That is, the amount we must invest (optimized or not) is not involved. Since, at any point of time, we can only invest what we can, the input is by default optimal!
  • The return needed is an output. That is, the return expected is not involved

The advantage of doing this is, it can immediately warn the (wary!) investor if something is impractical with the goal inputs. If the returned expected is too low it could mean inflation expected is too low and/or current cost of goal input is too low.

If the return is too high (the more common problem!) then it could mean that for the amount we can invest each month, some goals (or at least parts of them) cannot be achieved in tune with expectations. So we may need to modify goal inputs accordingly.

The goals in question are long term goals. That is they are 10 or more years away. This implies that we could afford to invest 60-70% in equity and the rest in debt. Assuming a post-tax return of about 6% from debt instrument the returns from equity can be estimated. If the return expected from equity is more than 12%, I would get worried and revisit my goal inputs. Although the worry-threshold may vary from person to person, equity returns above 15% even for goals more than 15 years away is simply impractical.

So decision making in this case is a combination of the investors and the goals risk appetite. That is the upper and lower limits of ‘how much risk I can take (and therefore returns I can expect*)’ is determined by ‘how much risk I must take’.

Use the attached calculator to check if your long term financial goals are achievable, given the amount you can invest.

Credits:

  • Inspiration for this calculator: Video demonstration of FiscAlmanac, a comprehensive, but expensive, financial planning software.
  • The ideas mentioned in this post and part III were first introduced to me by Mr Centhil of Horus Financials. An elaborate example can be found here: The Fallacy of Goal based Investment ‘Tagging’
  • Quote adapted(*): Risk and return are not necessarily related; risk and expected return are related. If there were no risk there would not be higher expected returns. – Larry E. Swedroe in ” Think, Act and Invest Like, Warren Buffet”

Download the Returns Estimator for Integrated Financial Goals!

Do share if you found this useful

We now publish both equity fund and debt fund (+ hybrid fund) screeners each month!
Use our Robo-advisory Excel Template for a start-to-finish financial plan! Now with a new demo video!  More than 415 investors and advisors use this!
Unlock the secrets of successful financial advisors and entrepreneurs with our new course!
My new book for kids: “Chinchu gets a superpower!” is now available!
Both boy and girl version covers of Chinchu gets a superpower
Both boy and girl version covers of Chinchu gets a superpower.
Most investor problems can be traced to a lack of informed decision making. We have all made bad decisions and money mistakes when we started earning and spent years undoing these mistakes. Why should our children go through the same pain? What is this book about? As parents, if we had to groom one ability in our children that is key not only to money management and investing but for any aspect of life, what would it be? My answer: Sound Decision Making. So in this book, we meet Chinchu, who is about to turn 10. What he wants for his birthday and how his parent’s plan for it and teach him several key ideas of decision making and money management is the narrative. What readers say!
Feedback from a young reader after reading Chinchu gets a Superpower (small version)
Feedback from a young reader after reading Chinchu gets a Superpower!
Must-read book even for adults! This is something that every parent should teach their kids right from their young age. The importance of money management and decision making based on their wants and needs. Very nicely written in simple terms. - Arun.
Buy the book: Chinchu gets a superpower for your child!
How to profit from content writing: Our new ebook for those interested in getting side income via content writing. It is available at a 50% discount for Rs. 500 only!
Did you know? We have more than 1000+ videos on YouTube to explore! Join our YouTube Community!

Join our courses in exclusive Facebook Groups!

  • 550+ members are now part of our new course: How to get people to pay for your skills! (watch 1st lecture for free). Learn how to get people to pay for your skills! Whether you are a professional or small business owner who wants more clients via online visibility or a salaried person wanting a side income or passive income, we will show how to achieve by showcasing your skills and building a community that trusts you and pays you!
  • Goal-based portfolio management! Join 2220+ members and get clarity on how to plan for your goals and achieve the necessary corpus no matter what the market condition is!! Watch the first lecture for free!  One-time payment of Rs. 3000 only. No recurring fees! Life-long access to videos (10+ hours content)  in an exclusive Facebook Group! Reduce fear, uncertainty and doubt while investing! Learn how to plan for your goals before and after retirement with confidence.

Want to check if the market is overvalued or undervalued? Use our market valuation tool (will work with any index!), or you buy the new Tactical Buy/Sell timing tool!
We publish mutual fund screeners and momentum, low volatility stock screeners .every month.
About the Author Pattabiraman editor freefincalM. Pattabiraman(PhD) is the founder, managing editor and primary author of freefincal. He is an associate professor at the Indian Institute of Technology, Madras. since Aug 2006. Connect with him via Twitter or Linkedin Pattabiraman has co-authored two print-books, You can be rich too with goal-based investing (CNBC TV18) and Gamechanger and seven other free e-books on various money management topics. He is a patron and co-founder of “Fee-only India,” an organisation to promote unbiased, commission-free investment advice. He conducts free money management sessions for corporates and associations based on money management. Previous engagements include World Bank, RBI, BHEL, Asian Paints, Cognizant, Madras Atomic Power Station, Honeywell, Tamil Nadu Investors Association, IIST Alumni Association. For speaking engagements, write to pattu [at] freefincal [dot] com
About freefincal & its content policy Freefincal is a News Media Organization dedicated to providing original analysis, reports, reviews and insights on developments in mutual funds, stocks, investing, retirement and personal finance. We do so without conflict of interest and bias. Follow us on Google News. Freefincal serves more than one million readers a year (2.5 million page views) with articles based only on factual information and detailed analysis by its authors. All statements made will be verified from credible and knowledgeable sources before publication. Freefincal does not publish any paid articles, promotions, PR, satire or opinions without data. All opinions presented will only be inferences backed by verifiable, reproducible evidence/data. Contact information: letters {at} freefincal {dot} com (sponsored posts or paid collaborations will not be entertained)
Connect with us on social media
Our publications

You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingPublished by CNBC TV18, this book is meant to help you ask the right questions, seek the correct answers, and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now. It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantThis book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at a low cost! Get it or gift it to a young earner.

Your Ultimate Guide to Travel

Travel-Training-Kit-Cover-new This is an in-depth dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step. Get the pdf for Rs 199 (instant download)
Free android apps