Investment goals
Setting financial goals for investors lets them focus on decisions that will help their overall objectives, rather than monitoring the outcomes for a range of individual investments. This is important because individual investors are prone to a widely documented behavioural bias where they are more likely to sell their better performing holdings than their losses. Over time, this effect can negatively affect total investment returns.
Yet faced with constantly moving financial markets, the possibility of changing financial circumstances or investment requirements, as well as a wide range of financial products and capabilities, investors need to put in place a robust and realistic investment framework.
A good start would be for investors to ask themselves the following key questions:
What is my investment timescale?
Is it short term (lifestyle), medium term (life costs like school fees) or long term (retirement planning)? The earlier the investing process starts, the more flexible and easier the investment choices will be and the greater likelihood of achieving the eventual goals. A longer term perspective also allows investors to maximise the benefits of compounding. This is when interest payments are repeatedly added to the initial amount invested over a period of time.
What level of risk will do I need to achieve my investment goals?
Differing investment styles have their benefits and drawbacks. More aggressive investors seeking to maximise returns are more likely to accept a higher investment risk profile with a greater ‘growth’ component in the portfolio. However, this brings the possibility of more volatile returns. Cautious investors, perhaps those nearer retiring, may wish to adopt a more conservative risk profile. These would be expected to provide lower but more steady returns.
How much can I afford to put aside?
There are a number of budgeting ratios which could help you decide, based on ‘needs’, ‘wants’ and ‘financial’ goals. 50/30/20 is one; this suggests 50% of income for groceries, mortgages and bills, 30% to shopping and dining and the remaining 20% to savings. Everyone’s circumstances are different, so this is not a rigid ratio. Other ratios include a variation, the 70/20/10 or the 80/20, split between spending and savings.
Am I prepared for the unexpected?
Financial goals should perhaps be considered moving targets. The key to stronger long term returns is to remain focused on the overall outcome, but investors should be prepared to adjust their investment strategy if needed.
More articles from our New To Investing mini-series
Investment goals
Setting financial goals for investors lets them focus on decisions that will help their overall objectives, rather than monitoring the outcomes for a range of individual investments.
Understanding risk
For investors, risk is the chance that a particular outcome or financial gain differs from its expected outcome or return. It is important to realise that risk is an inherent part of investing and shares a fundamental relationship with returns: the more risk an investor is prepared to take, the greater the level of potential returns.