Achieving Financial Goals with Goal-Based Financial Planning


Investing money is putting money aside for future needs. It can be a house, a car, raising children, early retirement and many more. Today, many people have realized that earning money at work is not enough to create wealth or become rich. Therefore, the investment is becoming very popular (a great trend). Today, most investors invest in stocks, mutual funds and other asset classes according to their capacity and time. Most people invest in an ad hoc way – putting money into random stocks or mutual funds – but there is a better way. This is called goal-based investing.

Goal-based investing also helps answer important questions like how much to invest and where and when to start investing. So, let’s take a look at goal-based investing.

What is Goals-Based Investing?

Goals-based investing is about investing for your future, with your goals in mind. It starts with making a list of all your goals, estimating the value of each goal, and preparing a monthly investment schedule that will lead you to achieve them. As a result, you effectively frame all of your financial dreams and goals. So why is goal-based investing the best way to invest in your future?

Investing without goals is a less disciplined way to invest. Unfortunately, many investors start the journey but lose hope during market declines or stop investing over time due to other commitments.

Goals help investors stay on track and keep them disciplined because they can measure and track progress monthly or quarterly.

A clear set of objectives helps to strategize and improve budgeting. As a result, investors handle small market movements better. This is a crucial advantage because not only do investors sometimes lose hope, but emotions can also push them towards bad decisions.

Financial goals also allow investors to eliminate greed and fear by maintaining disciplined, long-term investing.

The success of an investment is not determined by the quality of your investment, but by how quickly you invest. The famous Warren Buffett, who started investing at age eleven, is a prime example. His biggest regret so far is not starting earlier.

Consider an example where two people start investing at different ages, say twenty and thirty. The portfolio value of someone who invests ten years earlier can potentially be 50% higher than someone who starts later. Goals allow investors to visualize the power of compounding and help them get started early.

Behavioral finance tells us that many investors tend to be greedy in bull markets and fearful in bear markets. This behavior leads investors to buy risky securities at high prices and sell them when markets perform poorly, resulting in losses.

A disciplined investor makes decisions with a long-term perspective instead of panic-induced exits and entries. In the long run, the markets have always gone up anyway.

One way to do this is to have a risk profile and stick to it for long periods of time. Changing your risk profile from being conservative during weak markets and aggressive during bull markets is a surefire way to destroy long-term wealth.

If an investor chooses to have 60% equities and the balance in bonds, gold and other asset classes, it is essential to stick to 60% equities at all times. A goal-oriented approach keeps portfolio risk in mind and avoids getting distracted by fads.

No planning is complete without tracking progress. Tracking progress is the best way to assess performance and make changes that could help ensure goals are met on time.

Many investors may not recognize the power of compounding if they don’t see it in action in their long-term portfolio. Plus, here’s another side to it – a sense of accomplishment.

Having a diversified portfolio has many advantages:

1) A diversified portfolio helps mitigate the risks of investing in a single asset class or a few stocks.
2) Diversification allows objectives to be achieved without too much volatility.
3) The objectives-based approach promotes diversification by investing in a diverse set of asset classes.
4) Investors who diversify tend to see less downside when markets are weak.

Periodic rebalancing of investments is essential to the success of goal-oriented investing. Rebalancing can help improve returns and keep portfolio risk stable.

In conclusion, goal-based investing is the best way to maintain discipline, control emotions, and solve the problem of how much and what funds to invest. Almost all investors today make ad-hoc investments – moving to a goal-based framework will be much better in terms of results and less stressful in the investment journey.

(By Pratik Oswal, Founder, Glide Invest)


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