At the outset, all of you would agree with me unanimously that our ‘personal goals’ differ from one another.
The purpose of investing for one person could be to accumulate enough money to enable their children to go abroad for higher studies, whereas for some other person it may be just to save enough to cater for the marriage of one’s children. On the other hand, somebody wants to retire early, and that becomes the purpose of this person’s investment pursuit.
Another person wants to save enough money to buy a house on attaining a certain age, while for some one the end goal could be to buy a car, and these are some examples of different purposes of investing.
Further these permutations & combinations clearly demonstrating as to how our personal goals differ from one person to another. Sometime back I met one gentleman named John, who shared with me that whenever he has some surplus money, the same is utilized to buy an insurance policy [a new one or additional policy] either for himself or for some of his family members.
Peter treats insurance products similar to any other savings or investment products. While it is almost necessary for any human being to purchase an insurance policy, however overexposure of any magnitude is not wise, and thus not recommended.
One must understand the basic difference between an insurance policy and a typical investment instrument. The fundamental principal of buying an insurance policy is to hedge against unforeseen risks of any nature, while the basic purpose of investing is nothing but to achieve growth of money, whether in the form of capital appreciation or dividend/interest.
In order to find an optimum answer to the moot question stating - “do know why you are investing and what you want to accomplish”, there is a need to do some homework on our part as explained hereunder. The first thing one must do is to prepare his/her financial goals.
The set goals have to be in consonance with what one wants to accomplish in life. In case there is a conflict between one’s financial goals as set, and what one wants to accomplish in life, for sure the end result will not be desirable. Moreover, while preparing/ setting financial goals, one must be extra vigilant to ensure that the corresponding goals as set are ‘SMART’.
This implies that the set financial goals must be – Specific, Measurable, Attainable, Relevant and Time-bound. So please don’t end up setting vague goals for yourself, instead ensure that the set goals are SMART as explained.
A goal lacking on any of the SMART parameters will fail in the long run as it would lack the necessary impetus which is required to fulfil the desired objectives for a human being.
Once we have succeeded in framing financial goals which are ‘SMART’, the next logical step is to break down these goals into short-term (i.e. less than 1 year), medium-term (i.e. 1 to 3 years) and long-term goals (i.e. 5 years or above.
This is imperative in order to set one’s priorities right and also to devise the corresponding ‘Action Plans’ as would be required to achieve the set financial goals within a fixed time frame. Without doing so, you can’t determine/identify which investment product will fulfill the end objective.
If one’s short term goal is to save enough money so that one can take his/her family on a holiday tour during Christmas, then the most suitable investment product for this person would be a simple short term fixed income security.
To accomplish this goal if one decides to invest into an equity instrument [where you can not predict the end value]; it may not be wise to go this way and thus not recommended. On the other hand, to achieve one’s long-term financial goals – such as saving enough to buy a house or to have sufficient income during post retirement days, the chosen investment product must have a similar objective to achieve.
If one is looking for a risk free investment then the best choice is to park money into fixed income securities like fixed deposit with a bank or invest into a Treasury or Corporate bond. Conversely, if one is ready to take the extra risk on a longer term basis, then investment into equities is the best bet which over a period of time is expected to outperform other investment instruments. Don’t invest your hard earned money into a particular instrument just because others are doing so.
Study the underlying objectives of the instrument one is considering for investment and match the same with your corresponding financial goals as set. If investment objectives of the instrument are in conflict with the set financial goals, you must never put your money into it - howsoever lucrative it may appear on the face of it. Emotions, not logic, usually rule the average investors’ decision making. Investor psychologist and financial behavioral scholars have confirmed this.
Better investment choices require you to understand and embrace your emotions and predilections and determine how to avoid becoming your own worst enemy. And the only way such a situation can be avoided is by making oneself ready to do a small home work as explained above in order to find a credible answer to the question posed by my today’s article.
If you are not ready to do this simple homework, God forbid the end result will not be sweet but a sour pill to swallow.