We get it, when you say that retirement feels so far away and you just want to save for a trip to Disneyland.
While building your wealth to secure your future is important, most of us also have other shorter-term goals in mind too. Is there a way to afford both and all the other stuff you want in life? The short answer is yes, by saving and investing at the same time for long- and short-term goals.
This approach is called goal-based investing. Your goal could be something as simple as saving for a holiday or as ambitious as raising capital to start a business
How does goal-based investing work?
In regular investing, your portfolio is geared completely towards generating the highest possible returns based on your risk tolerance. You (or your fund manager) only think about maintaining the value of your portfolio, regardless of how much wealth it has generated so far.
In contrast, goal-based portfolios are designed to hit specific wealth targets because you want to spend the money on something.
This is basically using the envelope saving method - where you put money into different envelopes to save for different things - except that your envelopes are investment portfolios.
This means you are using your investments to generate passive income to fund your plans. Through this method, it is also easier to see your progress towards your individual goals.
Why should you invest based on goals?
Investing is a long-term journey. You should not expect to reach your goals in weeks or months, but years.
The average person may end up getting bored or impatient during this long timeframe. Setting up individual goals helps break up the boredom.
Why should you set individual goals?
- Clear goals will help you decide which one to prioritise
- Easier to track individual goals and watch their progress
- Get motivated to reach your goals faster when you see your investments grow
If anything, this is like applying gamification theory to your investment practices. Seeing progress keeps you motivated to stay in the game, and therefore keeps you going until you hit your goals and earn your reward.
How do you invest based on goals?
Firstly, you need to have financial goals. It doesn’t matter what those goals are. You could aim to buy a house, or you could simply be looking to maintain a predetermined amount of wealth in your portfolio (regardless of how the rest of the market performs).
Once you know what you want to achieve, then you can start ranking these goals according to priority and how soon you can (or want) to achieve them. This helps determine the investment risk profile needed for each of your financial goals.
In general, it helps if you ask yourself:
- What am I saving for?
- When do I want to achieve these goals?
- Which goals are most important to me?
|
For example: Abu is 35 years old. He is looking to invest to fulfill his life goals. Instead of creating a single investment portfolio to cover all his dreams, he uses goal-based investing. In doing this, he ranks what he wants to achieve in life and creates separate investment plans for each of them.
Using this example, you can see that Abu has created a list of goals he would like to achieve in life. The most important thing for him is to secure his newly born child’s education fund. This is a high priority to him, and he invests in a moderate risk fund. After all, he has almost 20 years to wait and, although he doesn’t want to risk losing it all, he is still willing to take some risk to earn higher returns. On the other hand, he also wants to buy a house for his family. This is a more immediate goal and he would like to have it sooner rather than later. Because the time horizon is so short, he chooses a conservative portfolio because he can’t afford to lose the house deposit that he’s saving up for. Abu is also saving for his retirement. He decides to take a more aggressive approach to this portfolio. This is because he has a long investment horizon for this goal, and he feels that this should be enough time to ride out any short-term market fluctuations. Because he believes that markets over the long term should grow in value, he is willing to take on more investment risk to earn higher returns. Finally, he would like to be able to take his family to Disneyland one day. While it is not a goal that he absolutely must achieve, it is something nice he would like to do for his family. Abu decides to place it on a lower priority compared to his other life goals. If he later finds himself short of funds, he can always stop contributing to this goal, so that he has enough money for his higher priority goals instead. |
How do you invest based on goals?
Trying to plan for multiple portfolios with different goals can be extremely intimidating. Most people already have trouble figuring out how to invest with a single portfolio.
|
One simple way to get started is to create an outline of your goals and how much time or money will be needed to get there. You can do this in the comfort of your home with a few simple taps on your phone using the Maybank Financial Goal Simulator. |
This will help you figure out just how much you can actually afford and how much work you will need to do to achieve your life goals. Once you have the big picture in hand, you can choose when and how to take the next steps to make it happen.