2.1 Your investment goals

What this topic covers:

  1. Investing is personal
  2. Your current situation
  3. Types of goals
  4. Being realistic with your goals
  5. Matching your goals to your investment strategy
  6. Why investment goals are crucial

An investor without goals is like a traveller with no destination. You can jump in your car, but until you know where you’re going, you won’t know which way to steer.

Investing is personal

Your investment goals are yours and yours alone. But what are your goals and why do you even need them? Let’s take a deeper dive into that.

Take your time

There’s no need to rush into things. Do plenty of research and consider the bigger picture as your investment goals will influence your investment strategy. To determine your goals, you need to look at your lifestyle holistically – not just think in terms of making more money.

So, consider what you want, where you want to go, and how building wealth can help you achieve it. Take the time to discover and define what’s really important for you in life – whether it takes days, weeks or months.

It's good to talk

For a more objective view, talk to mentors or professionals who can all provide you with a different perspective. They shouldn’t define your goals, but it’s useful to hear other opinions.

Ultimately, determining your goals will help define your investment decisions: it’s that crucial.

What are your current circumstances?

No discussion of investment goals should happen without first considering where you’re starting from.

your age Your age:

What life stage are you at? Are you a Millennial with years of work ahead of you? Gen X in your highest earning years? Or a Boomer close to retirement?

your career Your career:

What's your salary? How much can you afford to set aside for investing?

your lifestyle Your lifestyle:

Are you prepared to forgo elements of your current lifestyle to make investing happen?

Risk Risk:

What level of risk are you comfortable with?

What types of investment goals should you consider?

What do you want to get out of investing? Your goals can be simple and short-term or more complex with long-term objectives.

Short-term goals are usually something you want to achieve in the near future. Of course, in investing terms, this would be a bit longer than say lifestyle goals, but as a rough guide, you could say 1-2 years.
Short-term goals could include:

  • An overseas holiday
  • A new car / motorcycle
  • A bathroom or kitchen renovation

Long-term goals refer to accomplishments that will take significant time, effort, and planning to achieve. This time frame can stretch from a couple of years to a couple of decades, depending on what you’re aiming for.
Long-term goals could include:

  • Deposit for a house
  • Upgrading to a new home
  • Purchasing an investment property
  • The children’s education
  • Building wealth for retirement
  • Working towards financial independence

You can also create multiple investment goals – for both the long and the short term. While this may all seem obvious, it’s an important exercise to go through.

Be realistic about your goals

Investment goals should be clear and measureable, and achievable within a realistic timeframe. There's no point trying to rush a goal because you want to reach it before a certain birthday, for example. One way to approach this could be to strike a balance between aiming for long-term benefit without making too many sacrifices to your current lifestyle.

A good way to assess the impact on your lifestyle is to break down a larger goal into smaller chunks or plot the steps you’ll take to get there. Remember, sometimes your long-term goals can be achieved by reaching many short-term goals.

Saving money is a simple example. If your goal is to save $10,000 in a year, you’ll need to save roughly $833 a month or $192 a week. Is that achievable?

If you’re aiming for multiple goals, make sure they’re compatible. For example, if your goal for retirement is overly ambitious, you might be sacrificing short-term goals (education fund, house renovation) for long-term goals.

Matching your goals to your investment strategy

As we’ve seen in topic one, investments can generate returns in two ways: growth and income. Your goals can affect the type of return you want to earn, which in turn can affect the type of investments you choose.

Here’s an example.

Let’s say you’re looking for investments that can provide frequent income for you in the short term. In this case, you might choose shares that you believe are likely to pay higher dividends. On the other hand, if you’re looking to build wealth over the longer term, you might choose to invest in stocks that have a higher potential for capital growth.

Time frames are important as they’ll help determine how much risk you’re comfortable with. For short-term investment goals, you may prefer lower-risk investments that generally provide lower returns but are more stable and less likely to be affected by market fluctuations. For example: cash, bonds or some ETFs.

For longer-term investment goals, you may be prepared to consider high-risk investments with the potential for higher returns. That way, if the market falls, you can ride out the storm and wait for a potential recovery.

We’ll discuss strategy in more detail in topic 3.

Why investment goals are crucial

It’s important to have investment goals because having something to aim for will not only keep you motivated but also help keep you on track. In essence, setting investment goals will:

  • Form the basis of your investment strategy
  • Help you decide which asset class to invest in
  • Determine your tolerance for risk
  • Help you know if you’re on track

Think on this. An investor without goals is like a traveller with no destination. You can jump in your car, but until you know where you’re going, you won’t know which way to steer.

Ready for a little exercise?

A little mental exercise, that is. The S.M.A.R.T goals exercise is more than a clever acronym. It’s the Australian Investors Association’s recommended approach for setting investment goals. Why not give it a go?

your age

Step 1. Write down your investment goals:

What are you aiming for? Make each goal clear and specific.

Step 2. Create a measure:

So, you know when you’ve reached your goal.

Step 3. Make sure it’s achievable:

Consider the practical action you need to take to make it happen.

Step 4. Consider its relevance:

Do these goals relate to your life and are they realistic?

Step 5. Focus on timing:

Make sure you have a time frame so you can track your progress.

Next topic: 2.2 Budgeting


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