Setting SMART financial goals
Investors can make use of the popular acronym SMART to set goals that focus one’s efforts and increase the chances of success. SMART goals are specific, measurable, achievable, relevant and time-bound.
We are more likely to achieve goals that are expressed unambiguously, within reach and realistically achievable.
Goals should be attainable yet challenging. We should set specific criteria to monitor goal progress within a defined timeline. Their absence makes resolutions look more like wishes than goals.
Financial goals should also follow the SMART framework.
For example, your financial goal might be a comfortable retirement 35 years hence. You could target a pension or annuity amounting to three-quarters of your final salary and you would want to sustain purchasing power for your reasonable life expectancy.
Here we have a relevant, specific goal with a timeline. The goal is readily achievable if you have already started an investment programme, saving enough in a high equity multi-asset fund with a long-term investment horizon.
A qualified financial advisor can help you with the calculations, considering your current investments, income and expenditures. You can approximate your life expectancy, but we are all living longer and we should plan to retire later than past generations.
It is also important to monitor progress regularly. Assess your fund’s performance over much longer periods, from five to 10 years. Do not make changes to a portfolio based on short-term performance.
I would also suggest you do not compare your returns to those of friends or family. As with weight loss or fitness, comparing progress may affect your motivation.
If your goal is to fit into size 10 pants when you wear a size 16, your journey and timeline will look different to someone who is also targeting a size 10 but wears a size 12.
So it is with investments. The process, risk and time horizon of other people’s investment funds may be different to, and conflict with, your own goals and plan.
Within a longer-term financial plan, there may also be medium and short-term goals. For example, paying off a house or saving for a child’s education. These goals need their own timeline to become SMART goals. You should develop detailed strategies to achieve them.
Unrealistic and unachievable financial goals may produce unrealistic return expectations. These may lure you into products that promise returns far above what a prudential investment portfolio can practically deliver. In this case, heed the adage: “If it sounds too good to be true, it probably is.”
Karen du Toit is with Foord Asset Management