Setting your investment goals right

Setting your investment goals right

IF YOU FAIL TO PLAN, YOU ARE PLANNING TO FAIL

Setting clear financial goals right is the critical first step in goal-based investing. Goals should be realistic, specific, and categorized based on time horizon and priority. Goals can be short-term (around 3 years), medium-term (3-10 years), or long-term (over 10 years). Examples of short-term goals include saving for a vacation, vehicle down payment, or home renovations. Medium-term goals may include saving for a wedding, education, or home down payment. Long-term goals are often retirement, legacy planning, or funding major life dreams.

Setting the priority right!

When setting financial goals, be as specific as possible about the amount needed and target timeframe. Vague goals like "save for retirement" are hard to plan for. Instead, set a specific target, like "accumulate CHF 500,000 in retirement savings by age 60".

It's also important to assign a priority level to each goal based on importance and urgency. This helps determine the allocation of investment assets. For example, an emergency fund would be high priority, while a beach house may be lower priority.

This principle follows what is called the hierarchy of financial needs. When it comes to finances, we usually start our lives with basic goals called "vital" or "must have" goals, such as building a cushion or safety net for ourselves or our family. Over time, and with more financial cushion available, we can strive for a "nice to have" goal, such as a second car or luxury items.

When setting the investment priority ask simple: how does not reaching your goal affect your wellbeing?

By categorizing and prioritizing your goals, you can create an investment plan that supports your most important life goals in the timeframe you want. It also allows us to take different risks when investing for different goals. Vital goals allow for very limited risk taking, while self-fulfillment goals, after all other important financial needs have been met, allow for much higher investment risk.

So when using goal-based investing you need to know what you want to achieve with your investments by when and prioritize how necessary each goal is for you. The prioritization is of particular importance since it will determine how risky your investment should be.