How To Create A Goals-Based Investment Strategy
At Beyond Wealth, we believe in investing in a way that matches your goals. Rather than day trading and chasing returns, we think that if you start with a sound financial plan that prioritizes your goals and values, a solid investment strategy is sure to follow. Let’s talk about how you can start to organize your goals, and translate them into an investment plan that moves you toward the life you want.
How to Organize Your Goals
When you start to organize your goals, it’s helpful to begin with the big-picture. For example, most people feel comfortable investing for retirement because it’s a clear end-goal. Everyone knows that, at some point, their career will shift or they’ll stop working completely. As a result, you’ll need to replace your current income with savings in the future.
However, beyond retirement, it can be difficult to outline the other goals in your financial plan. Start by thinking through where you see yourself in 5-10 years. Ask yourself,
Do you live in the same home, or have you moved somewhere new?
Have you purchased a vacation home for the family?
Do you run your own consulting business after having left corporate America?
The opportunities are endless, and your first step should be to write down any and all goals you have. From there, you can start to narrow them down and prioritize.
Reverse Engineering Your Strategy
Once you have your list of top-priority goals, you can start to reverse engineer your strategy. There’s a clear difference between how you save for long-term goals (like retirement) and short-term goals (like buying the vacation property you’ve been dreaming about). It can be helpful to break your goals into three categories or “buckets”:
Long-term goals (10+ years away)
Mid-term goals (5-10 years away)
Short-term goals (when you’ll need the money in 2-5 years or less)
You can build your savings strategy according to which goals you have, and what timeline-category they fall under.
Reverse engineering your strategy really boils down to three things: goals, risk, and time. When you make your goals center stage, our team will be able to help you create a plan that supports those goals whether they be a year away or 30 years down the line.
But what if you aren’t sure what those goals are yet?
Planning for the Unknown
So, what do you do if you are maximizing all of your retirement accounts, have an emergency fund fully topped off, and have plenty of cash flow to meet your day-to-day spending needs? This is often where investors get stumped. It’s tough to know how to organize an investment strategy when it feels like all of your big goals are currently met.
When you’re in this situation, it’s crucial to speak with a financial planning team to set up a strategy that supports your mid and short term goals, even if you're not 100% sure what they are yet.
Investing beyond the standard retirement savings “to-do list” opens a world of flexibility and freedom. You could do a number of things like:
Scale back your work life in the next five years
Purchase a larger home
Start working toward creating generational wealth
Decide to prioritize travel for your family
Launch your own business in an industry you’re passionate about
Saving and investing your extra money allows you to take advantage of a lifestyle that you may have thought was beyond your reach. The question now becomes, how do you reflect your goals in your investment strategy?
It’s About Time in the Market, Not Timing the Market
Time is a key factor when it comes to investing. You may be wondering why short-term investments that focus on “winning big” aren’t often part of strategies that financial planners create. The truth is that chasing returns, or timing the market, is often a losing game.
When investors are looking to chase returns in the short term, they’re often investing in high-risk stocks and hoping to see a dramatic increase in value quickly. Unfortunately, this also means that the stock is just as likely to take an unexpected nose dive.
Instead, we encourage investors to focus on investing according to the time horizon of their goals. When your financial goals are close at hand, you want to protect the value of your principal by reducing the risk of your investments. You want to have access to your money for short-term goals, and to plan for the unexpected. The last thing you want is to lose principal, not have time to recover, and then need the funds immediately.
As you continue to look out to your mid and long term investment “buckets,” your strategy will shift to a point where you can more comfortably take on risk. This is because, the longer your funds are invested, the more likely it is that you’ll still see a positive return—despite market volatility. Take a look at the following stock market statistics:
Source: https://awealthofcommonsense.com/2015/11/playing-the-probabilities/
When you watch how the market behaves in the day-to-day, you may feel like you see almost an equal amount of ups and downs. However, as this example clearly shows, the longer you invest the more the odds move in your favor.
That’s because the longer you hold your investments, the more time you’re giving your portfolio to bounce back after a market downturn. You’re effectively minimizing your risk just by giving yourself more time to recover and take advantage of compound interest to grow.
The truth is that investing takes time, why else would you start saving for retirement in your early 20s?
Remember: It’s about time in the market, not timing the market.
Beyond Wealth Can Help
Our team knows that a strong investment plan comes from your goals and values. The right investment isn’t always the most flashy, rather it is about organizing a plan unique to you and your needs both now and in the future.
Are you ready to start reverse engineering your investment strategy? Reach out to us! Our team would love to talk to you about what your goals are, and how we can help you achieve them.
Andrew Comstock, CFA
Disclaimer: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.