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Achieving financial goals through goal-based financial planning

Goal-based investing is the best way to maintain discipline, keep emotions in check, and solve the problem of how much and what funds to invest.

Achieving financial goals through goal-based financial planning
Goal-based investing is investing for your future, keeping your goals in mind.

Investing money is putting away money to use for future needs. It may be a house, a car, kids’ education, early retirement and many others. Today, many people have realised that making money on the job is not enough to create wealth or become wealthy. Hence investing is becoming very popular (an excellent trend). Today most investors invest in stocks, mutual funds and other asset classes as per their ability and time. Most people invest in an ad hoc way – putting in money is random stocks or mutual funds – but there is a better way. That is called goal-based investing.

Goal-based investing also helps answer important questions like how much to invest and where and when to start investing. So, let’s take a look at goal-based investing.

What is Goal-Based Investing?

Goal-based investing is investing for your future, keeping your goals in mind. It starts with making a list of all your goals, estimating the value of each goal and preparing a monthly investing schedule which will lead to achieving them. As a result, you effectively give all of your dreams and financial goals a framework. So why is goal-based investing the best way to invest in your future?

1. Maintains Discipline

Investing without goals is a less disciplined way of investing. Unfortunately, many investors start the journey but lose hope during market declines or stop investing over time due to other commitments.

Goals help investors stay the course and keep investors disciplined as they can measure and track progress monthly or quarterly.

A set of clear goals helps strategize and improve budgeting. As a result, investors deal with poor market movement better. This is a crucial advantage because not only do investors sometimes lose hope, but emotions can also drive them toward poor decisions.

Financial goals also enable investors to remove greed and fear by keeping investing disciplined and long-term.

2. Starting Early

Success in investing is not determined by how well you invest but by how early you invest. The well-known Warren Buffett, who started investing at eleven, is a great example. His biggest regret until today is not starting earlier.

Consider an example where two persons start investing at different ages, say, twenty and thirty years of age. The portfolio value of someone investing just ten years earlier can potentially be 50% more than someone starting later. Goals enable investors to visualise the power of compounding and help them start early.

3. Identifying Risk Profile

Behavioural finance tells us that many investors tend to be greedy in rising markets and fearful in down markets. This behaviour leads to investors buying risky securities at high prices and selling them when markets perform poorly, leading to losses.

A disciplined investor makes decisions with a long-term perspective instead of panic-induced exits and entries. In the long term, markets have always gone up anyway.

One way of doing this is to have a risk profile and stick to it for long periods. Switching risk profiles by being conservative during weak markets and aggressive during bull markets is a sure-shot way of destroying long-term wealth.

If an investor chooses to have 60% in equity and the balance in Bonds, Gold, and other asset classes, it’s essential to stick to the 60% equity at all points in time. A goal-based approach helps keep in mind the portfolio’s risk and helps avoid getting distracted by fads out there.

4. Goals are the best way to track progress

No planning is complete without tracking progress. Tracking progress is the best way of assessing performance and making changes that could help ensure goals are met on time.

Many investors may not recognise the power of compounding unless they witness it in action in their portfolio over the long term. Plus, here’s another aspect to this – a sense of accomplishment.

5. Goals are best achieved with diversified Portfolios

There are numerous advantages of having a diversified portfolio:

1) A diversified portfolio helps mitigate the risks of investing in one single asset class or a few stocks.
2) Diversification enables the achievement of goals without too much volatility.
3) The goal-based approach promotes diversification by investing in a diversified set of asset classes.
4) Investors who diversify tend to see less downside when markets are poor.

6. Rebalancing is critical for all goal-based investors

Periodic rebalancing of investments is critical for the success of goal-based investing. Rebalancing can help enhance returns and keep the risk of the portfolio stable.

In conclusion, goal-based investing is the best way to maintain discipline, keep emotions in check, and solve the problem of how much and what funds to invest. Today, almost every investor does ad hoc investing – moving to a goal-based framework will be much better in terms of outcomes and lead to less stress in the investing journey.

(By Pratik Oswal, Founder, Glide Invest)

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