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How to Set Investment Goals – The 4 Step Formula for Financial Success


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Goals are an important aspect of life. Even in childhood we’re encouraged to strive for good grades. As life progresses, the goals you set become bigger, whether they are educational goals, career goals, lifestyle goals, or investment goals. 

Many of us learn how to set goals for our education, career, and even lifestyle as we make our way through school, investment goals seem to fall by the wayside. Few students get even a small nudge in the right direction when it comes to planning their financial future. 

You should never enter the stock market without an investment plan, and every investment plan should be based on a set of reasonable goals. But how do you go about setting them?


How to Set Investment Goals

Your financial plan, capabilities, and desires are unique to you. Only you can set meaningful goals for your investment activities. Doing so doesn’t have to be a difficult task. In just a few short steps, you’ll be on your way to creating a meaningful, goal-driven, investment portfolio. Here’s what you’ll need to do:


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1. Identify Your Financial Goals

You don’t want to go into the process of setting investment goals blindly. Instead, it’s best to follow a roadmap to ensure you’re on the right path each step of the way. 

The Australian Investors Association recommends using the acronym S.M.A.R.T. as you set your personal financial goals as an investor. Here’s how it works:

Specific

Investors should make each goal clear and specific. 

For example, instead of your goal being to save money, be more specific. You might make your goal to save a certain amount for a down payment on the kind of house you want, to pay off your credit card debt, to build an emergency fund equal to six months of expenses, or to reach a target number for your nest egg that will afford you a comfortable retirement. 

Outlining specific investment objectives creates a meaningful target to hit through your investment activities. 

Measurable 

Each goal you plan to achieve in your investment portfolio should be easy to measure. For example, if you’re working toward a down payment on a new home, don’t just set the goal of saving money; earmark your investments with a goal of saving for a down payment and set a specific amount of money you’ll need. This way, when your portfolio has reached the goal, it’s easy to see what you’ve achieved. 

Measuring your progress toward a goal also allows you to celebrate milestones along the way, such as reaching 10%, 25%, 50%, and 75% of your down payment. Recognizing and celebrating these milestones could give you more motivation to get to 100%.  

Achievable 

When setting your goals, it’s important to think practically about your financial situation and set goals you can realistically achieve. 

For example, if you earn $50,000 per year, it wouldn’t be wise to set a savings goal of $40,000 by the end of the first year. That would be nearly impossible to achieve without major lifestyle changes or a new source of income. Setting goals that are impractical will only lead to frustration when they’re missed, which could result in you deciding to quit on the goal entirely. 

On the other hand, you don’t want to set goals that are too easy to achieve either. 

For example, if you earn $50,000 per year, a goal of allocating $10 per month to your retirement plan may not be setting the bar high enough. Your goals should be set to challenge you; when you do achieve them, it should feel like an achievement. 

When setting long-term goals, consider using free online calculators that will outline how much money you need to save each month in order to reach your goals considering average market growth and the power of compounding gains. 

Realistic 

Realism is crucial when setting goals. If your goals are unrealistic, they’ll be impossible to achieve, which could turn you away from investing all together. Worse, unrealistic goals can encourage excessive risk-taking in search of mythical returns.  

For example, it would be unwise to set a goal of generating 20% annual returns on a consistent basis from stock investing. The long-term average annual return in the stock market is around 10%. That’s the whole market averaging over a period of decades — it’s not likely for the market to generate the same returns in multiple consecutive years. There will be some up years, some down, and some flat. 

Don’t let the misconception that the market will bring you riches beyond your wildest dreams lead you to setting unrealistic goals that ultimately make little to no sense. 

Timely

Finally, your goals should include time frames. If your goal is to save $40,000 for a down payment on a home, it’s not enough to say, “I’m going to invest and save $40,000 to buy a new house some day.” You could sit on that goal and retire before you ever put the down payment on the home. 

Instead, it’s better to say, “I’m going to invest and save $40,000 to buy a new house over the next eight years.” Now the clock is ticking for you to begin investing and saving toward this goal within this time frame. The time limit will push you to aggressively take action toward reaching it.

This mid-term goal is specific, measurable, achievable, realistic, and timely. 


2. Sort Goals by Time Frames

Most people have more than one financial goal they’d like to achieve in their lifetimes. For example, many people strive to buy a car, buy a house, pay for college for their children, and retire comfortably.

When setting up your investment plan, it’s important to consider how each individual goal fits into your long-term time horizon. This will help you prioritize your near-term, mid-term, and long-term investments. 

For example, say you have a short-term goal of putting a down payment on a house within the next three years, a mid-term goal of paying for your child’s education, and a long-term goal of retirement. 

How you invest to achieve these goals may be different depending on your priorities. You may be willing to take different risks to be more aggressive toward achieving your down payment goal, but not as willing to take risks when building an education fund for your child or a comfortable retirement for yourself. 

Time prioritization makes it easier for investors to decide how much of their overall investment funds to allocate toward each goal and which investment strategies to use to reach that goal.  

All you need to do is sort your individual goals into specific time frames. Here’s how it’s done:

Short-Term Goals

Focus on your short-term goals first. These are the goals that should take you three years or less to achieve. Some of the most common short-term goals include paying off credit card debt, buying a car, or paying for a vacation.  

Medium-Term Goals

Medium-term goals are quite a bit larger than short-term goals with a time frame to achievement of between three and 10 years. Some of the most common medium-term investment goals include saving for college tuition or for the down payment on a home.

Long-Term Goals

Finally, long-term goals are goals that will likely take more than 10 years to achieve. Some of the most common long-term goals include building a nest egg for a comfortable retirement or building a business. 


3. Match Goals to an Investment Strategy

When building out your investment plan, it’s important to match your investment strategy with the goals you’ve outlined for yourself. Keep in mind that there are several types of investments to use as tools for success. 

Some of the most common investment strategies include:

Growth Investing

Best for: growing wealth for aggressive, long-term goals.

Growth investing is the process of investing in stocks that are on a clear upward trajectory. These companies are known for producing compelling growth in revenue, earnings, and ultimately share price. 

On the other hand, growth investments come with high levels of volatility, which is Wall Street’s favorite way to say “risk.”

Growth investment strategies are best to use when working to achieve your most aggressive goals. However, you should also consider your risk tolerance. People with a minimal appetite for risk may want to consider other strategies. 

Income Investing

Best for: protecting wealth when nearing long-term goals, producing income for short-term goals.

Income investing is on the opposite end of the spectrum. These investments are generally relatively stable, generating slow, steady gains in terms of price appreciation. However, what they lack in growth they make up for in income, paying dividends or coupon rates on a regular basis. 

Income investing is best for those nearing their long-term goals who aren’t willing to risk heavy declines as a result of market volatility. Moreover, if your goal is to maintain a sound nest egg through retirement while generating income to live on, income investing is generally the best way to go. 

Value Investing

Best for: investing for long-term goals.

Value investing is the process of focusing the brunt of your investment allocation on stocks that are undervalued compared to their peers. The concept behind this style of investing is that undervalued stocks are like buying stocks when they’re on sale at a discount. At some point, the majority of value stocks are likely to grow to a more realistic valuation, resulting in outsize gains for the investor. 

This style of investing isn’t as risky as growth investing or as safe as income investing, but it serves its purpose specifically for those with relatively long-term goals. 

When value investing, you never know when (or if) the stock will climb to a more fair value. As a result, these investments are best when they can be held for a long time, making them great for those reaching for long-term goals. 

Indexing

Best for: low-effort investing for any type of goal.

Indexing is the process of building a portfolio of index funds. These are exchange-traded funds (ETFs) or mutual funds designed to track the performance of a specific index, such as the S&P 500 or Dow Jones Industrial Average

The strategy appeals to those with little experience or time to manage an investment portfolio. Due to the high levels of diversification in these portfolios, index funds are a generally safe option when compared to less diversified investments. 

Indexing is good for meeting all types of goals, short-, mid-, and long-term. You might choose a more conservative bond index fund if you’re saving money for the short term, or a broad stock market index fund for medium- and long-term goals.


4. Monitor Your Progress

Finally, setting goals is the first step to investment success, but it’s not the last one. It’s important to check in on your performance from time to time to ensure you’re on the path toward success. 

Every three to six months, take a look at the performance of your portfolio and assess the likelihood of you achieving the goals you’ve set for yourself. If you find that at the current rate, reaching your goals will be nearly impossible, you may need to adjust your goals, increase your contributions, or both. 

On the other hand, if you find that you’re going to achieve your goals far faster than expected, use that information to improve upon them and challenge yourself to hit a higher bar. 


Final Word

Goal setting is an important aspect of investing. Your goals will help guide your investment decisions, challenge you to become the best investor you can be, and set the stage for your long-term financial success. 

When setting your goals, using the S.M.A.R.T. method as your guide will help balance them, ensuring they’re specific, measurable, achievable, realistic, and time sensitive. While a little market research may be necessary to set reasonable goals, doing so will be well worth your time in the long run. 

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Joshua Rodriguez has worked in the finance and investing industry for more than a decade. In 2012, he decided he was ready to break free from the 9 to 5 rat race. By 2013, he became his own boss and hasn’t looked back since. Today, Joshua enjoys sharing his experience and expertise with up and comers to help enrich the financial lives of the masses rather than fuel the ongoing economic divide. When he’s not writing, helping up and comers in the freelance industry, and making his own investments and wise financial decisions, Joshua enjoys spending time with his wife, son, daughter, and eight large breed dogs. See what Joshua is up to by following his Twitter or contact him through his website, CNA Finance.

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