You might have seen financial advisors or bloggers like me chant repeatedly “invest with a goal”, “invest with a goal”. Have you ever wondered why? After all, many people regularly ask in financial forums, “I do not have a goal in mind, I just want to save or invest or build wealth, how should I proceed?” It is definitely possible to invest without a goal and use simple thumb rules but a goal can make a world of difference to how you manage money.
Let me avoid using cliches likes “investing without a goal is like playing football without a goal post or golf without a putting hole” and get straight to it. Having a goal essentially means having a target corpus and a target date. I have explained the process of goal setting with an Audi car in mind: How to buy an Audi Car: Planning a financial goal from start to finish
This target corpus is important because it tells you how much you need to invest, or it tells you whether you are spending too much or not. Of course, there are additional inputs likes a reasonable return expectation from at least fixed income and equity asset classes, when to use which asset class and in what proportion (aka asset allocation). These can be seen in any standard goal calculator but some thought is necessary prior use.
Now, forget the benefits of having a goal before you start investing. Anyone who has been investing for a few years now will tell you choosing the “right mutual fund” is not a big deal. There are new problems that surface only after you start investing.
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For example, when should I rebalance? When should I exit my mutual fund? Should I sell some unit if the return is higher than my expectation? How long can I wait for my fund to become profitable? These questions no goal calculator can answer, ahem unless it is the freefincal robo advisory template
This is where a goal comes in. Immediately you know when you need the money and how much of it. Also, the target corpus is not a fixed amount. Each year you need to reevaluate it based on current costs.
By instinct, you can start increasing the fixed income allocation. That is, you can start moving money from market-linked assets to safe fixed interest instruments. Unlike what most “experts’ recommend – wait 2-3 years before goal deadline – this has to be done soon after you start investing and in a step-wise manner (factored in the robo template). See how it helps here: How to reduce risk in an investment portfolio
Risk management is natural when a portfolio has a goal linked to it. Without a goal, my target corpus estimate could be wrong, to begin with, it could be off by a huge margin if I do not re-evaluate it periodically and if I wait for equity to deliver or be over-confident and stay invested in equity, I could end up with an amount far less than what is necessary.
A reasonable return estimate is necessary to start the goal planning process, but beyond that, since (if) the portfolio is market-linked, there will be no relation between what you project in excel and what you actually get. You cannot eat your XIRR or buy stuff with it, but you can do that with a target corpus. That is a real, tangible target towards which our portfolio should march on – slowly but surely.
So stop investing randomly. So stop claiming you do not have a goal – it just means you have not really given it thought. List your goals, protect your family first with an emergency fund, life and health insurance, start investing and manage risk and return with your goals in mind.
At least for the sake of your investments, list your financial goals!
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