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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.

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!

Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Capital Group or its affiliates.

Lorna Denny

Good morning, everyone, and welcome to the first in our series of Investment Basics podcasts. My name is Lorna Denny, and I'm delighted to be joined today by Claire Swindon from Capital Group. We will be discussing how investment goals lie at the heart of your own investment plan. Good morning, Claire.

Claire Swindon

Morning, Lorna.

Lorna Denny

It's often said that from little acorns, mighty oaks grow and the same could be said of investments, regular investment at an appropriate level of risk might, over time, bring you closer to your investment goals. And it's worth bearing in mind that although professional investment manager might be best qualified, oversee your investments as they grow, the very first step sits with you.

Lorna Denny

Claire, thank you for joining us. Would you agree that having clear objectives for your savings can be the best way to start a successful investment plan? I think you're.

Claire Swindon

Absolutely right, Lorna. The first step really is to set some goals and create that plan. And interestingly, the starting point might not be thinking about numbers and investments, but actually, what do you want to achieve? What do you want to achieve in life? What goals are you looking for? Topics like When do you want to retire? These are the really important questions to start with.

Lorna Denny

Yes, I understand from what you're saying that really this is personal also that not every set of investment goals is the same.

Claire Swindon

That's right. You know, everyone's going to come to this tunnel conversation from a different point. You might be just starting out in your working career or someone who's closer to retirement. But I find it's really helpful to maybe think about three things, and I call them the three E's. So should it hopefully be easy to remember? So first of all, what are your essential goals?

Claire Swindon

And these are the absolute necessities for day to day living. Thinking about your sort of annual living expenses. And then after that, I guess the next layer up would be thinking about enhancer goals. So what would you like to achieve? But you could live without, depending on interest. This could be saving up for a special trip, saving for a deposit for a home.

Claire Swindon

And then final E is I would think of as endowment goals. So maybe more aspirational goals. Say this could be about leaving a lump sum to charity. Or what do you want to think about in terms of inheritance for your children? So things that are perhaps, you know, more aspirational in nature and maybe a little bit further away as well.

Claire Swindon

So thinking about those three E's helps you maybe break down what you're trying to achieve through these.

Lorna Denny

For the three E's are indeed. And do you remember those points? But if we could just unpack what you said. There is a more and with perhaps a bit more detail before we make a start on the actual investment elements.

Claire Swindon

I'll think about another three things, maybe to put a bit more clarity around those objectives and goals. First of all, what's your priorities? What is it you want to achieve first? Thinking about those enhancing goals, you might have a few different things. You want to get that vacation. The home deposit. Which of those you want to put first in the running order?

Claire Swindon

Then what's your investment horizon? What timeframe are you thinking about achieving some of these goals around? And then finally, risk tolerance. Thinking about risk is how confident you want to be about achieving those goals. How certain do you want to be that you're going to realize those visions that you've set for yourself?

Lorna Denny

Yes, indeed. And we will come on to this idea of risk tolerance shortly. It is one of the crucial points as an investor should be happy with before setting out on this investment journey that firstly they put other questions to use think they might consider.

Claire Swindon

I like to think about creating that financial vision. Long term, your vision could be around topics like When I want to retire, where do I want to be living in retirement? And some of those more endowment focused pieces. So do I want to be leaving money to children, charities, friends and family that perhaps in some of the shorter term pieces, Do I want to buy a home?

Claire Swindon

I planning to take an extended leave from work. We think about people taking a break to have a family, but it could also be for other reasons taking a break. And then do I want to change things over time so I might be working for a larger company now? Do I want to start a business in the future?

Claire Swindon

And I think critically is has this changed at any point? So it's not uncommon for our vision to change over time. We're talking about starting here, but I think it's one of those journeys that you'll keep revisiting over time.

Lorna Denny

Essentially, you raise that point because the term investment generally carries with it the notion of a medium or longer term timeframe. But as you say, this could change. So would you say choosing a timescale for a given investment goal is a reasonable starting point?

Claire Swindon

Like all good things in life, timing is absolutely key and setting that investment horizon is really critical part of your goal setting. I keep talking about retirement today because I think that's a goal most of us look towards. Fit retirement goals tend to be quite long term and maybe allow you to have a little bit less certainty and maybe take on a bit more risk.

Claire Swindon

But something that's got a shorter term time horizon and say maybe you want to save to help with university tuition fees for your children, you need to have a bit more certainty around that. So time horizon, the question is a really critical one.

Lorna Denny

So let's say we have identified an investment goal which naturally is set for a date in the future. The big question now is how this goal can be reached in the timeframe available. And it's not just a question of setting money aside, is it? There is the key consideration of how fast we'd need that money to grow, as you suggested that in order to hit the target.

Lorna Denny

And I think this is where risk tolerance or investment risk come into the equation.

Claire Swindon

So I think we can make risk into something a little simpler to think about because it is a really big part of investments. So what we're really thinking about is the chance that you're not going to reach those objectives that you set for yourself. So what is the outcome you want and how likely you are to reach it?

Claire Swindon

And I find feeding on the idea of confidence. Is it a practical way of thinking about it? So how confident do you need to be for those objectives you set? And if you go back right to the beginning, when I talked about the three E's for those essentials, there's critical costs that you have every year. I suggest that you want to have a pretty high confidence level.

Claire Swindon

So let's say you want to be over 90% confident for the enhancers. You can probably take a little bit more risk. Maybe you don't have to be quite so confident that you're going to achieve exactly the goal that you're setting. So let's say 75%. And then for the final group, there's a longer term endowment ideas. You can probably give yourself a lower confidence level.

Claire Swindon

Say I'm going to say around 50%. What I'm not saying is you're looking to not achieve those goals, but you're prepared to take more risk, have more variety of outcomes against those goals.

Lorna Denny

And suddenly the investment risk starts to be a little clearer. And that's very helpful about the confidence level. And there are, of course, going to be differing levels of risk out there.

Claire Swindon

You're right, there are different risk levels we can think about. We've talked about sort of short, medium, long term in time. When we think about time, I think for risk, you can sort of think about low medium highs. Terms you might see on investment products would be things like conservative, moderate, aggressive to sort of reflect against those. But broadly, what we're saying is higher risk assets may have the potential to give you high return, but you're going to have to be comfortable with a bumpy ride using some financial language, more volatility in that lower risk investments probably will give you a lower return stream, but perhaps a less bumpy ride, a less volatile or steadier

Claire Swindon

return. And that's the trade off that you're going to be facing when you start to look at how you're going to execute on some of these objectives you set for yourself.

Lorna Denny

On a theoretical level. But I can see it's very important to be both familiar and also comfortable with the level of investment risk you're going to need to reach your own investment goals. But on a practical level, it's also important to feel happy with the level of contributions, whether they be one off or regular that are going to be needed to reach your target.

Claire Swindon

You're right. We really need to start all of us with what's affordable. Going back to the beginning, we might set ourselves rather exciting goals, but we have to start with what's really practical for us to save each month. And I think that's for me, two ways to think about this. If you're somebody who's got a regular monthly salary having maybe a discipline around putting that salary into different pots could be a really good way to go about it.

Claire Swindon

Say you've got a certain amount of money that's your essential spend each month and then you allow a certain amount just automatically to go into your investment or savings account. That's great if you're on a monthly payment schedule, if you're somebody who perhaps works around projects or is more commission based, your income probably looks a little bit more lumpy and set.

Claire Swindon

That might not be the most sensible approach for you. It might be that you look to put a certain amount towards your essential costs and once you've reached that point, you could then have a sort of discipline around putting money into investments. But you will notice I've said the word disciplined twice in my explanation because really that is the key to have a methodical, systematic way of approaching this, because that is the surest way to make sure you actually do it.

Claire Swindon

I'm sure we all have examples in our life where we need to have routine and structure to make sure that we follow through on our best intentions.

Lorna Denny

Yes, I think we probably do. But from what I'm hearing, then regular saving is really the tried and tested method of hitting your target.

Claire Swindon

I absolutely agree. And I think the other thing that that brings the other really strong benefits is it takes some of the emotion out of it. You know, every day we're greeted by headlines about what financial markets are doing in times of exuberance. When markets are strong and going up quickly, that tends to be when people make investments.

Claire Swindon

Essentially, people are buying high, say buying in the expensive markets. And when we wake up in the morning and read headlines about stock markets falling and bad economic numbers, that tends to be when people don't feel confident about putting money into the market. So essentially, people don't buy at the low points and do buy at the high points if you allow your emotional sense to drive you.

Claire Swindon

So having that sort of regular discipline about investing actually allows you to sort of take some of that emotion out and stops you timing the market, which is really a very tough thing to get right. And many very experienced fund managers don't find that easy to do. So having the discipline about a regular investment contribution is the key way to take some of that emotion away.

Lorna Denny

Yes, I can see what you're saying. But isn't this style of saving more suited to large investors?

Claire Swindon

Well, I think one of the great thing that's happened in recent years is just how accessible making investments is. Way back. You would have had to go to a stockbroker and have a larger portfolio. But actually nowadays it's quite easy to invest. You know, the minimum investment months are small. You can make small, regular contributions. Getting into the markets is easy and an expression.

Claire Swindon

I love that I learned from one of my colleagues. That is, it's all about time in the market, not timing. So the benefit is actually just about getting invested. Even if you choose all the theoretically wrong moments to enter, it's still better over the long term to actually have been invested and take advantage of market returns and just the compounding effect of actually being invested and continuing to grow your assets.

Lorna Denny

Yes, indeed. And one of my favourite facts is that was it not Einstein? He said that compound interest was the eighth wonder of the world.

Claire Swindon

I do love the power of compounding.

Lorna Denny

Yeah, indeed. So now we have this investment goal and we have a plan as to how it could be achieved, What could possibly go wrong?

Claire Swindon

Well, first of all, none of us has a crystal ball. We can't predict what governments will do about tax treatments where the market's going to go. But I'll say it critically. Our lives change it. Know what will happen about your earnings, your health. So you have to be prepared to be flexible. I think that's really critical. But I think what's so important about having that regular saving stream that we talked about, so the regular investment stream is actually that should, if you have the right approach and goal setting, should allow you to actually weather some of this storm.

Claire Swindon

So hopefully if you've been prudent and have those essentials well covered, you should be in a good position. If life just maybe threw a bit of a curve ball.

Lorna Denny

That is very helpful advice. And is there any last piece of advice that you could share with us before we set out on this journey?

Claire Swindon

I think I would just say, look, now, don't be afraid of mistakes. We don't know what's coming next, but setting some really important, prudent goals for ourselves, first of all, allows you to have a great conversation at home potentially about where you want to be in the future, but also really allows you to take some of the emotion and fear out of making these sort of decisions.

Claire Swindon

And I guess the final thing I would say is investing in markets really isn't that accessible activity for people, and we shouldn't be frightened to take that first step.

Lorna Denny

Thank you, Claire. And these are wise and reassuring words. So here's my summary then my five key takeaways on investment goals. Number one, it's your plan. Only you can set the ball rolling. Number two, have a clear idea of the time you will need to hit your target. Number three accepts that all investment carries risk that you can choose the level of risk that suits you.

Lorna Denny

Number four, make sure that your budget can stretch to the contributions you'll need to make. A Number five don't panic. Markets will always throw up surprises, but staying invested for the long term is considered one of the best ways to achieve your investment goals. Thank you, Claire, very much indeed.

Claire Swindon

Thank you. It was lovely to join you.

Lorna Denny

And why not join us for our next podcast when we will be having a clear look at understanding risk.

Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success. Pablo Picasso

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