Where there’s a goal, there’s a way

Our goals are the best guides for our investing strategies

By: Sayantani Kar

Our life goals are the best way to define our, the retail investors’, investment strategy, rather than returns on investment.

We are not in the markets to time them through urgent buying and selling. In fact, timing the market can be a futile exercise. We just want to beat inflation to earn enough for our retirement kitty, children’s higher studies and maybe, for that down payment on a home.

Retail investors like us are increasingly finding our goals effectively telling us which investment is best suited for us.

We look at the risk-adjusted returns for a goal and ask if we can achieve it using a given asset in the time frame we have.

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Equities, for example, are a category where individual investors should stay invested for a longer period to earn substantially and even out losses due to volatility. But if we were investing in equities to afford a luxury car in say, two years, then chances of meeting the goal would be less than ideal.

With the World Cup underway, we recently listed investment ways to achieve the goal of watching a WC on the grounds, for example.

Our risk appetite gets determined by our goals, as well. Financial advisers consider the average risk in all our goals and account for the portion of our total assets needed to achieve each of them, to arrive at our overall risk profile.

A valuable practice when investing with goals in mind is to shift funds to more stable asset classes from the high-returns but riskier assets closer to the deadline. This lets us optimise our earnings while there is time, and avoid last-minute disappointments at losing our money when we are ready to use it.

Short-term goals are safest to be achieved with low-volatility instruments like bonds or even bank fixed deposits and long-term goals are best achieved through equities.

One of the most relevant instruments for retail investors in goal-based investing is exchange traded funds or ETFs. These conveniently let us partake in the returns the markets afford. They come in a range of products such as equity ETFs, bond ETFs, and gold ETFs, and a retail investor can pick them according to the goals she has.

What’s more, being passive funds, ETFs are lower in cost than mutual funds, ensuring we have a larger portion of our money earning for us rather than paying for administrative charges.

With goal-based investing we are relieved of the need to scour the news for changes in the markets overnight or jump to buy or sell stocks. Once we allocate our funds, we can sit back and let them take their course.

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