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If you have goals, you should be a goals-based investor

CA Aaditya Chhajed 
on 10 September 2020

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Investing anything time, effort, or money sacrifices short-term rewards for a long-term payoff. 

Whether you are HNI or not, be it any type of investment, sometimes investors lose sight as to why they're investing. 

Goals-based investing offers a useful structure to map out concrete investment goals, prioritize them, build portfolios to meet them, measure progress against them, and make adjustments (if necessary) to stay on track.

The benefits of setting goals extend to investing by improving investor behavior and increase the likelihood of financial success.

What is goals-based investing?

Goals-based investing is a framework to translate financial goals into 

  • Forecast future expenditures and 
  • A llocate money to separate portfolios 

Designed to meet those specific goals.

An investment without a goal is like a traveler without a destination.

SMART framework help establish clear goals.

If you have goals, you should be a goals-based investor

Prioritize goals based on necessity and time horizon:

High-priority goals are those that are indispensable. The impact of not meeting them is high. Low priority goals are aspirational; the impact of missing them is low. A low priority goal may be saving for a dream vacation in 15-20 years. Rigorous prioritization helps ensure that you're set up well to meet your most important goals.

Build investment portfolios to achieve financial goals:

Conservative investment portfolios are likely best for high-priority goals with short time horizons. This is because the impact of not meeting these goals is high and there's less opportunity to recover from poor market performance over short-term horizons.

 

Measure progress/Make adjustments.

Undoubtedly financial situations change. The portfolio plan should be reevaluated and modified when necessary. An advantage of goals-based investing over traditional holistic investing is the ability to measure progress toward individual investment goals. 

Life events such as getting married, changing jobs, or having kids can serve as catalysts to measure progress toward financial goals, update investment strategies to better position yourself to meet your goals, or to reprioritize them.

Rolling With the Punches:

Breaking up future expenditures into concrete goals, prioritizing them, creating a plan, and monitoring progress could increase investor success by promoting good behavior.

Conclusion:

  • When using goals-based investing, keep the following three things top of mind:
  • Be as detailed as possible when setting and prioritizing financial goals: A better-defined target and honest prioritization sets you up better to accomplish your financial goals.
  • Use appropriate portfolios to fund goals: Conservative portfolios are a better bet for high-priority, short-term goals while aggressive portfolios make more sense for low-priority, long-term goals.
 

Don't set it and forget it: Periodically measure progress toward financial goals and adjust prioritization if necessary.

Thank you very much for your time.

The author is the founder of Aaditya Chhajed Financial Advisory Services, a Wealth Management firm in Pune. The author can be reached at chhajedaaditya@gmail.com


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