Learn About Investing
The answer is simply to improve life by achieving financial goals. Given this, it’s surprising that many people don’t set any goals before investing. Let’s face it, to achieve an aim it’s useful to know exactly what you’re aiming at. Just ask William Tell.
The goals people have for investing or saving are often similar, but can also be highly individual. Here are few common examples:
- cash reserve – using savings to cover emergency expenditure
- life events – such as a first home deposit, wedding
- for the kids – college or university fees
- lifestyle – such as a dream holiday, sports car
- retirement planning – providing income in old age
Note how goals can span the generations.
Once you have goals, the next logical step is to select an investment approach to get there. This plan won’t exist in isolation, as it needs take account of your broader financial situation. How much you end up with (in either real or nominal terms) depends on:
1. What you can afford to contribute (in a lump sum and/or monthly)
2. How long you invest for (your ‘time horizon’)
3. The rate of return on your investments (how fast your money grows – in either real or nominal terms)
You’ve got to be realistic on all counts. After all, you could reach your target faster – or with lower monthly contributions – if you rely on higher rates of return. But higher returns usually mean higher risk. Is that something you’re really comfortable with?
Setting goals is important from a practical point of view. Having this focus can help you avoid knee-jerk investment decisions that don’t tie in with your ultimate objectives. Significantly, the nature of the goal can also influence the nature of your investments.
For example, the goal may determine the appropriate level of risk. How much can you really afford to lose? If you’re saving up for a luxury treat, it may not hurt too badly if a risky investment goes wrong. But would you feel the same way about your pension?
While some goals may lie many years ahead, others are much closer at hand. Money put into a pension may only be needed several decades later. Savings for a wedding, on the other hand, might be needed in three years rather than thirty. Investments with lower volatility are generally more suited to short time horizons.
Establishing goals can be useful, but it’s also perfectly possible to invest without them. An alternative approach is to decide what you can afford to save each month and stick to doing that. Over time, a general-purpose nest-egg can be built up. This can be dipped into as needed.
Whether you’ve set goals or not, it pays to keep track of your investments. It’s best to do it regularly, but even infrequent checks can make a real difference. If you’re not on course, you’ll need to increase the amount you’re investing or adjust your goals downwards. If things are going well, you can look forward to exceeding your initial target, or consider lowering your contributions. That said, past performance won’t necessarily reflect what happens in future.
The joy of goals
It’s tempting to see investing as a dull, but necessary evil that sensible adults find themselves forced into doing. It needn’t be.
Focussing on the goals first – and then on how to achieve them – makes for a more pleasant journey as an investor. Ultimately, it’s not about stocks or bonds or what-have-you. It’s about the best way of getting the keys to your first home, seeing your child graduate without debts, or just enjoying more time on the beach.
The task of matching a set of goals with suitable investments isn’t as difficult as you may think. However, those who feel daunted by it may choose to seek independent financial advice.
Find out how much money you will need in retirement and how much you should pay into a pension each month to achieve this.
Use this calculator to estimate how much a lump sum and/or monthly investment might be worth in future.
What are the techniques that will enable you to stick to your savings goals through the long days ahead?
People who set a money savings goal save faster than those who don’t!
Money Advice Service