How to de­ter­mine your in­vest­ment goals

Hav­ing a goal makes build­ing a port­fo­lio a lot eas­ier

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Hav­ing a fi­nan­cial goal is an im­por­tant first step when it comes to in­vest­ing. It can be tricky to de­ter­mine what your goal is, so we’ve come up with a few ideas and some ac­com­pa­ny­ing in­vest­ment strate­gies to help you on your way.

WHY DO I NEED A GOAL?

There are lots of rea­sons why it is im­por­tant to have an in­vest­ment goal.

From a psy­cho­log­i­cal point of view, hav­ing a goal makes it eas­ier to put money aside each month. If you’re just sav­ing for a rainy day you might be tempted to dip into your savings, whereas if you have a spe­cific goal mak­ing small sac­ri­fices, like cut­ting back on eat­ing out, can seem more worth it.

Set­ting a goal will help you to de­cide how long you need to in­vest for.

‘The timescale around your in­vest­ment goal will de­ter­mine the type of in­vest­ment re­quired and whether or not you are pre­pared to take any el­e­ment of in­vest­ment risk,’ says Alex Ed­mans, head of prod­uct at Saga Money.

For ex­am­ple, a 30 year-old sav­ing for re­tire­ment will be able to take more in­vest­ment risk with their money and tie it up in longer-term in­vest­ments than a 30 year-old sav­ing for a hol­i­day within the next few years.

Joshua Ger­stler, fi­nan­cial ad­viser and com­pany di­rec­tor at The Or­chard Prac­tice, says un­less you have a goal you won’t be able to as­sess the per­for­mance of your in­vest­ments.

‘You should at least know if you are in­vest­ing for in­come or growth,’ he says. ‘If the in­come from your port­fo­lio in­creases by 10% and the val­u­a­tion drops by 10%, how do you de­cide whether this is good or bad if you do not know what your end goal is?’

WHAT IF I DON’T HAVE A SPE­CIFIC GOAL?

Some ex­am­ples of in­vest­ment goals are sav­ing for re­tire­ment, a house de­posit, a wed­ding, a dream hol­i­day, a loft con­ver­sion or your chil­dren’s ed­u­ca­tion.

A lot of in­vestors sim­ply have a goal of ‘in­vest­ing for the fu­ture’. Neil Adams, head of pen­sion plan­ning at Drew­berry Wealth, says al­though there is noth­ing wrong with this, it can be less re­ward­ing – and so a lot harder – than sav­ing to­wards a spe­cific goal.

He sug­gests try­ing to break down your goals into clear achiev­able tar­gets with fi­nite times­pans.

‘Most of us do bet­ter when we break down chal­lenges into smaller, more achiev­able tar­gets and this is es­pe­cially true when it comes to sav­ing to­wards a fu­ture goal,’ he says.

‘It’s far eas­ier to think in terms of sav­ing, say, £250 a month for three years than it is to set out to

save £10,000 in one go.

‘This ap­proach means that you meet a se­ries of smaller goals along the way rather than just sav­ing end­lessly toward a fin­ish­ing line that could be years in the fu­ture.’

Ed­mans rec­om­mends think­ing about your life­time plans and as­pi­ra­tions for the fu­ture and whether th­ese re­quire a fi­nan­cial com­mit­ment.

‘For ex­am­ple, you may wish for your chil­dren to go to pri­vate school and so sav­ing for school fees will be­come a goal. Al­ter­na­tively, you may wish to spend your re­tire­ment trav­el­ling, in which case re­view­ing pen­sion plans and mak­ing sure that you are well-pre­pared for your re­tire­ment will be cru­cial,’ she adds.

HOW DO I SAVE FOR SHORT-TERM GOALS?

Short-term goals tend to be three years or less and include things like sav­ing for a dream wed­ding or hol­i­day, buy­ing a new car or build­ing up a de­posit for a new prop­erty.

Ryan Hughes, head of fund se­lec­tion at AJ Bell Youin­vest, says a short time­frame leaves lit­tle op­por­tu­nity for tak­ing risk.

There isn’t enough time to ride out the stock mar­ket’s vo­latil­ity, so if you in­vest in equities there’s a chance that the mar­ket could crash just be­fore you need the money.

This means cash-based savings prod­ucts tend to be most suit­able, de­spite in­ter­est rates be­ing at an his­toric low.

CAN I IN­VEST FOR MEDIUM-TERM GOALS?

A medium-term goal would en­com­pass any­thing within the next five to 10 years – per­haps sav­ing up for your chil­dren’s univer­sity fees.

You can take some el­e­ment of in­vest­ment risk but should prob­a­bly avoid very high-risk in­vest­ment strate­gies as there may not be suf­fi­cient time to re­coup mar­ket vo­latil­ity.

As­sets to con­sider include gov­ern­ment and cor­po­rate bonds, which can be ac­cessed through funds or ex­change-traded funds, as well as lower-risk equities and prop­erty.

Hughes says in­vest­ing monthly could help to smooth out the vo­latil­ity of the mar­ket. He sug­gests us­ing a Ju­nior ISA and sav­ing monthly into global equities, for ex­am­ple via Fi­delity In­dex World (GB00BLT1YP39),

which tracks the MSCI World In­dex.

HOW DO I IN­VEST FOR LONG-TERM GOALS?

A long-term goal could be build­ing up enough money for your re­tire­ment in 10 or more years’ time.

In gen­eral, the longer the time­frame the more risk you can af­ford to include in your port­fo­lio.

Adams says the de­fault po­si­tion should be to start with a no­tional 100% ex­po­sure to equities and then whit­tle this down by di­ver­si­fy­ing into as­set classes such as prop­erty and bonds, based on your in­di­vid­ual pref­er­ences.

Within th­ese spe­cific as­sets you can add risk by in­vest­ing in riskier re­gions, for ex­am­ple emerg­ing mar­kets.

Hughes sug­gests long-term in­vestors con­sider funds like Bail­lie Gif­ford Global Al­pha Growth (GB00B61DJ021), Fi­delity Emerg­ing Mar­kets (GB00B9SMK778) and River & Mer­can­tile UK Eq­uity Smaller Com­pa­nies (GB00B1DSZS09).

‘Th­ese funds would all work for this pur­pose and could even work to­gether in a port­fo­lio for a higher-risk in­vestor,’ Hughes says. (EP)

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