How do I set investment goals?
Thankfully, setting goals doesn’t have to be hard.
A financial goal is simply something that you set out to achieve in a certain timeframe.
Common goals include accumulating enough wealth or income to improve your current lifestyle, planning to fund key expenses for your family or to pay for your retirement.
Why are investing goals important?
Investing goals are important for a number of reasons:
Direction – financial goals provide direction for your investing. Your goal – and its timeframe – will influence the types of investment you consider.
Motivation – financial goals help you stay disciplined in your investment process. It is easier to exercise self-restraint and stick to your budget because you know what you’re aiming for. It is important that your financial goals are important to you.
Accountability – writing down your goals makes you accountable for your progress. To help this process it is important to regularly review your goals to make sure you’re on track.
Achievement – reaching your financial goals provides you with a sense of achievement that you can celebrate and which is a reward in itself.
How do I set goals?
Goal setting doesn’t need to be difficult or time-consuming. You can do it whichever way works best for you. This is one process that works.
Write your goals down. This can be done on paper or your computer, but it is vital to have a written record to review down the track.
Use the SMART format to make sure your goals are appropriate. They need to be:
Specific – make your goals specific and narrow for more effective planning
Measurable – Decide what metric will prove you’re making progress and re-evaluate when necessary
Attainable – make sure you can reasonably accomplish your goal within a certain timeframe
Relevant – Your goals should align with your values and long-term objectives
Time-based – Set a realistic end date for each goal so you can measure your progress toward it
An example of a smart-based goal may be to save $20,000 for a new car within two years. This is specific; it can be measured - you will know when you reach the $20,000 savings and can track your progress. You can list the specific actions you need to take to reach the goal. If you have chosen well, it will be realistic and within your ability to achieve. It also has a specific timeframe.
Write a list of actions that you need to take in order to reach your goals.
For example, to achieve the goal above, the actions might be:
Research high-interest savings accounts to find the best account
Save $280 per week in a high-interest savings account for the next 104 weeks
Regularly review your goals. The more you focus on them, the more you will think of ways to reach them.
Reviewing your goals regularly also provides you with a psychological reward and keeps you motivated. If you aren’t achieving your goal, it gives you the opportunity to revise your strategy.
Timeframes are a key consideration when you are setting investment goals.
Usual timeframes are short, medium or long term. Sometimes you can set short term goals that build toward a larger long-term goal.
Typical goals might include:
New car – 2 years
House renovation - 5 years
Retirement - 25 years
Risk and return
Different investments carry different levels of risk and likely return. Understanding how long you have to achieve a goal will help you understand the risks you might be willing to accept.
It is generally accepted that if you are investing for a short-term goal, a volatile investment such as shares may not be a good idea. Although the long-term trend in the value of shares has been upwards over time, in the short-to-medium term they can easily drop in value, causing you to fall short of your goal. For a longer-term investment, such as saving for retirement in a decade or more, shares are more likely to be appropriate.
By contrast, if your financial goal is only a year or two away, such as saving for a car, then a high interest bank account or term deposit will ensure your investment doesn’t fall in value, although its potential to generate returns in the long-term is far less.
Sitting in between these extremes, are other assets such as bonds and property, with less volatility than shares, but higher expected income than a term deposit.
One example of this type of investment is Firstmac’s High Livez managed fund, which recently celebrated its 10th anniversary.
High Livez invests in prime Residential Mortgage-Backed Securities, (RMBS), which are bonds secured against a large pool of Australian residential mortgages.
Firstmac aims to provide stable monthly income returns from these RMBS, and suits investors with a 3-5 year time horizon, who are seeking returns from fixed income securities.
For more information please see here.
It is important to get independent financial advice before making any investment, to ensure it is suitable to your individual financial circumstances.
Here we have covered some of the key things you should be considering when setting financial goals. If you make calculated decisions to reach your investment objectives from the start, you’ll find that things tend to be a lot easier in the long run.