Benefits of goal-based investing
Identify your priorities
Your goals should be SMART (specific, measurable, achievable, relevant, and timely). For instance, “My current age is 30. I wish to retire at the age of 50 with a corpus of Rs 10 crore,” is a more practical goal than something vague like “achieving financial freedom.”
This will help you understand that you have 20 years to achieve your goal and exactly how much to invest regularly to achieve it. If your goal looks far-fetched you can still achieve it by increasing your savings, cutting expenditure, creating additional sources of income or extending your retirement age. Measurable goals are easier to track and make course correction.
Prevents impulsive decisions
When you don’t have a goal attached to your investment, chances are that you may withdraw it to fulfil a desire, which could have been avoided or postponed. For instance, you may be tempted to buy that latest car, gadget or indulge in an exotic holiday. If you have some surplus cash and your goals are set, you would exactly know how much you can splurge, invest or pay off debt.
The primary goal of investing is to generate risk-adjusted return. Since your goals will be divided into short term and long term, you would invest in a mix of equity and debt funds to achieve your goals. Adding a variety of asset classes like equity, debt, gold, real estate will help diversify investments and reduce risk to some extent.
For instance, you would build a more conservative portfolio if you are nearing retirement since your primary objective would be to preserve wealth and generate a steady cash flow. In contrast, someone in his 20 or 30s will build a more aggressive portfolio in order to save for a long term goal like retirement.
Avoid market noise
Investors today have instant access to their portfolios. They are overloaded with information from different sources. Any adverse news can prompt them to cash out from equities if there is no goal attached to their investment. Equities as an asset class tends to be volatile and a correction is in fact a good time to add equities. Investors with a clear goal will understand that they would not be swayed by short term market movements and stick to their goals.
A financial advisor can help you identify your goals and chalk out a plan to identify the right products to help you achieve your goals.
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