What is Goal-Based Investing?
Just as you would not board a taxi without a destination in mind, one should not start investing without a clear goal in mind. Setting goals is very powerful because it gives you direction, focus, discipline and motivation. Every working person has at least one financial goal. While some of your financial goals are current for example rent, food, transportation, many of your other financial goals occur in the future for example retirement, a child’s education, buying a home, and so on.
It is possible to meet future financial goals using future income e.g. from future salary or business income. However, there are no guarantees that you will have that future income, or even if you do, that it will be sufficient to meet all your future financial goals. It is therefore sensible to plan, save, and invest for those future financial goals in advance by putting away some of your current income.
Goal-based investing is an approach that aims to help you come up with a plan to save and invest current earnings smartly to accomplish a specific financial goal in the future. We all have financial goals but sometimes we do not know how much it will cost, how much to save today, or where to invest the savings in order to achieve future goals. For example, it is quite common for people to save for retirement without knowing what retirement is going to cost. However, if you knew what the 20 years in retirement will cost, how much you need to save from your monthly earnings, and where to invest those savings, you would approach the future much more confidently. XENO Investment has the best tools to help you plan, save, and invest for your goals.
A goal-based approach evaluates every investment, asset and/or strategy based on its ability to help you reach your financial goals. Your objective might be to have a secure retirement, fund your child’s university education, or save up for a down-payment on a home. Each of these goals has a different time horizon, risk tolerance, and level of priority. Success is defined by how well the investment helps you reach your goal within the desired time horizon, and not by earning the highest returns in any given year. Risk, on the other hand, is defined by the failure to meet the stated goals.
Plan Your Goals
A well-articulated goal gives you purpose and focuses your attention on the steps required to attain it. Your goal might be to attain a secure retirement, build wealth for yourself and your children, comfortably fund your child’s university education, and so on. Each of these goals has a different time horizon, risk tolerance, and level of priority and therefore it is prudent to plan, save, and invest for them separately. Here is an example of good planning tools you can use.
Estimate Savings Needed
If a secure retirement is what one is saving for, it would be wonderful to know what retirement is going to cost and then set that as a target. Or if one would like to comfortably fund a child’s 4-year university education 10 years down the road, it would be invaluable to know what those four years at university are going to cost and set that as a target to work towards. To complete the picture, it is important to estimate what one needs to save from current monthly income in order to hit that retirement or education target.
Once the amount one needs to save to reach their financial goals is determined, those savings need to be invested otherwise their value will be eroded by inflation over time. Whenever one undertakes an investment, one eye should be on the expected returns and the other firmly on the underlying risks. Because investment is an inherently risky business, it always prudent to have a professionally managed and well-diversified portfolio. The objective of diversification is not earning a higher return, rather, it is to reduce the overall risk of the investment portfolio. A well-diversified investment portfolio might have some real estate, money markets, bonds, and equities investments in the appropriate proportions.
Monitor Performance and Progress
Once you have articulated your goals, estimated what savings are needed from current income, and formulated an investment plan for the savings, all is set and your journey towards achieving your goals commences! You will now need to consistently save and invest according to your investment plan. However, it is important to be able to periodically monitor not only the performance of the investment strategy but also the progress towards the stated goals.