Investment Goals

Setting investment goals is the first step in getting ready to invest. Investment goals not only tell you where you are going but also where you’re currently at. If you consider investing a journey, then your investment goal is the destination you desire to reach with the wealth you will acquire over time.

"People with goals succeed because they know where they're going." Earl Nightingale

You wouldn't want to go on a trip without bringing a map so you shouldn’t embark on investing without knowing where you want to wind up regardless of asset class and whether you are just accumulating cash or trading stocks. Consider your investment goals as your personal compass that helps you stay on track and puts you back on your path in case you get off track. Just like an airplane that is going from Los Angeles to Tokyo is able to reach its final destination by constantly making adjustments in its direction. Over the entire journey the pilot has made thousands of adjustments in direction which allows the plane to reach its final destination.

Write down your investment goals

By writing down your goals you will clarify what you really want and increase your commitment so that your chances of actually obtaining your goals increases significantly. Writing down your goals helps to keep you on track and overcome obstacles. By focusing your attention on the final outcome rather than the process will keep your motivation up and your determination high when things get tough.

The importance of setting goals cannot be emphasized enough. The power of goal setting was demonstrated in a study at Yale University which compared students with clarify defined goals and students without goals. The 3% of the students who had written goals and took consistent action were happier, more confident and had better grades. In addition, they also ended up making more money than the other 97% of students after graduation.

You will perhaps have multiple investment goals as you probably want many things in life so you should set up goals with different time horizons. It is a good idea to have short, medium, and long term goals. Your short term goals will include items you want to achieve within a year and that those investments should not include assets that are volatile, cash is often best. Medium term investment goals has a 2-5 year time span and require a larger amount of capital, it is reasonable to invest in a little more volatile assets since you have more time to recover in case of setback. Finally, your long term goals has a much longer time horizon and include things such as saving for retirement, kids college education, etc.

Make regular contributions

First, only invest money that is non essential for your daily living expenses. Do not invest things like your rent money! However, with that said make a decision of how much you want to invest every month and setup a weekly or monthly automatic contribution plan. If you decide at the end of the month how much money you want to put away for savings and investments chances are that there is not any money left and if there is still some money left at the end of the month you may eventually get behind one month and break your investment habit. By automating your contributions you will take your emotions out of the decision making process when it comes time to transfer funds to your savings / investment account since you have already made the decision. Psychologists have discovered this method to be a very effective tool in overcoming indecision and starting new habits.

By forcing yourself to make automatic contributions you will soon adjust your new spending behavior and make wiser spending decisions. Have you ever looked at your credit card statement and wondered how it got so large? We frequently spend much more money than we realize on things like $5 starbucks coffees and non essential items that add up at the end of the month.

Starting early and making regular contributions will add up to big money as long as you consistently maintain this habit. For example, a person that is making $60,000 per year and starts to invest at the age of 25 and make regular monthly contributions of 15% of his salary into a retirement account will accumulate $2 million dollars by the time he is ready for retirement at the age 65, assuming an average market return of 7%.

Risk

Investment risk refers to the probability of losing all or part of your capital. The typical investment adviser would tell you that stocks are risky and bonds are safe. An investment advisor would allocate stocks and bonds according to your risk profile. This method is true to some extent but I consider a lack of financial education and the absence of an investment goal an even greater risk. If you don’t know where you are going and don’t know what you are doing you are very unlikely to end up where you want to go.

There are plenty of investment advisors and talking heads on TV that tells you exactly what you should do. However, these people don’t know what is best for you. The people on Wall Street are in the business of selling stocks and financial instruments and most fund managers and investment advisors gets compensated for how much stock they sell regardless of future performance. Taking charge of your own financial situation is the most powerful way of reducing risk.