Investment goals

Goal setting in life is important because it can help individuals to focus their behaviour and remain motivated. This in turn can lead to better performance on tasks, helping contribute towards higher levels of personal and professional success. The story is no different in finance.

Setting financial goals for investors allows them to focus on decisions that will contribute to their overall objectives, rather than monitoring the outcomes for a range of individual investments. This is important because individual investors are prone to the ‘disposition effect’, a widely documented behavioural bias whereby investors are more likely to sell their better performing holdings than their losses. Over time, this effect can adversely affect total investment returns.

Yet faced with constantly moving financial markets, the possibility of changing financial circumstances or investment requirements, as well as a wide range of financial products and capabilities, investors need to put in place a robust and realistic investment framework.

A good start would be for investors to ask themselves the following key questions:

Is it short term (lifestyle), medium term (life costs like school fees) or long term (retirement planning)? The earlier the investing process starts, the more flexible and easier the investment choices will be and the greater likelihood of achieving the eventual goals. A longer term perspective also allows investors to maximise the benefits of compounding, the repeated addition of interest payments to the initial amount invested over a period of time.
Differing investment styles have their benefits and drawbacks. More aggressive investors seeking to maximise returns are more likely to accept a higher investment risk profile with a greater ‘growth’ component in the portfolio, but with the possibility of more volatile returns. Cautious investors, perhaps those nearer retiring, may wish to adopt a more conservative risk profile with a greater proportion of ‘value’ assets. These would be expected to provide lower but more steady returns.
There are a number of budgeting ratios which could help you decide, based on ‘needs’, ‘wants’ and ‘financial’ goals. 50/30/20 is one; this suggests 50% of income for groceries, mortgages and bills, 30% to shopping and dining and the remaining 20% to savings. Everyone’s circumstances are different, so this is not a rigid ratio. Other ratios include a variation, the 70/20/10 or the 80/20, split between spending and savings.
Financial goals should perhaps be considered moving targets. The key to stronger long term returns is to remain focussed on the overall outcome, but investors should be prepared to adjust their investment strategy if needed.

Investment Goals Podcast

AXA IM Select’s Lorna Denny sat down with Capital Group’s Claire Swinden to discuss how investors might approach their investment goals and the importance of investment planning. Concise and highly informative, it highlights some essential issues for consideration as well as providing investors with a helpful checklist.

The first in our Investment Basics podcast series, it’s ideal for those starting out on their investing journey but should also prove useful for more experienced market participants. Happy listening!

Document

Starter Guide to investing

When you’re new to investing, getting started can seem like an uphill struggle. That’s why we decided to create a starter pack to help demystify the process and provide an introduction to the basics.

Download guide

More articles from our New To Investing mini-series

Setting financial goals for investors allows them to focus on decisions that will contribute to their overall objectives, rather than monitoring the outcomes for a range of individual investments...
Groupings of investments that have similar financial characteristics, each asset class carries its own set of risks and rewards. Investors’ investment goals, like their personal circumstances...
For investors, risk represents the chance that a particular outcome or financial gain differs from its expected return, however, it’s important to recognise that risk is an inherent part of investing...
A fund is a type of investment that enables multiple investors to collectively purchase securities, whilst retaining ownership and control of their shares. Similar to a listed company, a fund is owned collectively by its shareholders, with an investment objective and policy dictating what the fund manager purchases.
From year to year, it is difficult to predict which asset classes will be the best performers. Most investment specialists agree about the benefits of spreading your money across different investments. This diversification can reduce volatility, smooth out highs and lows in returns and help avoid unnecessary risk.
Only investing locally means missing out on opportunities offered by global markets. Better diversification, more investment options and reduced volatility are among some of the reasons investors should consider investing globally.
Both savings accounts and multi asset funds can offer benefits for investors. Over the long term, investing and saving can complement one another and potentially help towards achieving financial goals.
Instead of focusing on just one type of investment, multi-manager funds invest in lots of other single-focus funds. This can allow investors to choose a single fund that diversifies investments and combines the talents of many fund managers all in one.