Aligning Investments With Goals: A Key To Financial Success

In the world of investing, one of the most common mistakes individuals make is prioritizing returns over aligning investments with their specific financial goals. This approach often leads to suboptimal outcomes and can hinder long-term financial success. By shifting the focus to aligning investments with goals, investors can develop a more strategic and effective investment strategy that maximizes the likelihood of achieving their objectives.

Understanding Goal-Based Investing

Goal-based investing involves identifying and prioritizing specific financial objectives, such as buying a house, saving for retirement, funding child’s education or marriage, creating a charitable legacy and the likes. Each goal has its own time horizon, risk tolerance, and requires a unique investment strategy.

Even if an investor is risk averse, when it comes to long term goals like building a corpus for retirement, child’s education or marriage or for creating a charitable legacy, an investor can consider investing into an equity oriented offering. This is because each of these goals are likely to be a decade and more away. This means even if the markets were to turn volatile in the interim, there is reasonable time for the investments to recoup its lost ground. And over the long term, such fluctuations tend to even out if historical trends are to be considered, make it a win-win for the investor. Furthermore, as one nears the stated goal, the investor may consider transferring the corpus to a hybrid or a debt scheme to protect the corpus from market volatility.

Key Points in Goal-Based Investing

Defining Clear Goals: Clearly articulate each financial objective, including the amount needed and the time horizon for achieving it. This will help the investor make an informed choice when it comes to choosing the financial instrument and the asset class mix required to achieve a defined goal.  

Risk Tolerance Assessment: Evaluate risk tolerance for each goal, considering factors such as age, financial situation, and comfort with market volatility. Bottom line being for long term goals which are a decade and more away, investors can consider relatively risky asset classes like equity for achieving the intended goal.

Asset Allocation: The practice of spreading investments across different asset classes is called asset allocation. Allocating investments across different asset classes based on time horizon and risk tolerance for each goal is of paramount importance. This is because no single asset class performs well every year. For example: During the initial phase of the pandemic, equity as an asset class was under severe strain, post the sharp market correction. At the same time, debt held steady while gold glittered and delivered reasonable returns. As a result, a portfolio which had allocation to all three asset classes - equity, debt and gold – would have done well as compared to a portfolio which was overweight equities.  In effect, adhering to asset allocation helps achieve the optimal diversification thereby reducing risk and optimizing returns.

Inflation is a Reality: When planning long term investments, several investors ignore the impact of inflation, especially on long term goals. When it comes to aspects like child’s education, medical expenses which becomes apparent during the retirement phase of one’s life, the inflation in each of these areas is typically in double digits. If one fails to consider the impact of inflation on the overall calculation, the investor will feel short changed as the goals near their tenure.

Regular Monitoring and Review: Periodically reviewing investment portfolios to track progress toward each goal is a mandatory requirement. Such reviews will force an investor to take a call on outperforming or underperforming investments and make necessary adjustments as may be the need of the time. Another aspect one must be mindful about is that review should be limited to say once a year. Reviewing the portfolio every quarter is not a prudent move and it leads to unnecessary tinkering which over the long term may prove to be detrimental to the investment objective.

Tax Efficiency: Consider tax implications when selecting investment vehicles and strategies. Though the impact may not be obvious at the start of the journey, but as the years go by, the impact of taxation will creep up and becomes obvious at the time of redemption. So, have a holistic view, including the taxation aspect when deciding on an investment vehicle.

Disclaimer

The views are personal and are not part of the Outlook Money editorial Feature.