Build Your Investments Around Your Goals

It is likely that your goals will be quite different from the examples I have given in my previous blog posts. A blog can’t tell you what your financial goals should be. Whatever your goals are – however conservative or radical, lowly or lofty – the first step toward achieving them is properly defining them.

When I work with my clients, I emphasize the importance of financial goal setting. Before we get into any discussions about funds, stocks, bonds or real estate, I first assist my clients as they set their goals. Without a complete set of goals, there is no road map to follow. I don’t know which gauges to monitor or how to read the meters. Without the specific missions that our goals define for us, an investment strategy is nearly worthless. Unless financial objectives are properly considered in the development and implementation of your financial plan, there is a good chance that you will be managed by your investments, not the other way around.

For example, suppose a couple comes to me with a goal to retire in twenty years. Suppose further that they have defined this goal sufficiently to allow me to determine that they will need about $150,000 annually (after taxes and in today’s dollars) in retirement for twenty years. They currently have $500,000 in savings and would like to save an additional $5,000 each year. With these parameters in place, I can help them to see their likelihood of funding their retirement goal. Of course, investment returns fluctuate every year, so realistically we can’t assume a nice steady growth rate. This is why our financial planning firm uses technology that runs thousands of investment return scenarios based on the expected risk/return of a base portfolio. This analysis (referred to as Monte Carlo analysis) will show the client the likelihood of the goal being fully funded. This helps the client put things into proper perspective. The figure below shows a part of the report that monitors my client’s retirement goal. As you can see from the figure below, my clients currently have less than a 50/50 chance of fully funding their retirement goal.


Knowing this, I can show my clients how different investment scenarios will affect their retirement goal. You will see that I have created an adjusted scenario which assumes they contribute $10,000 annually and decrease their annual retirement needs to $140,000. This adjusted scenario also assumes they put their investments into a slightly riskier portfolio. Under these assumptions you will notice their chances of fully funding their retirement increases to 72%.

Inexperienced investors may be reluctant to determine their goals until they see what sort of returns their short-term investments bring. “If I get a 20% return on my investments this year, I may not need to wait five years for that boat,” they might say. Or if a mutual fund they own increases 30% one year, they might decide to empty the emergency cash fund they established, just so they can buy more shares in the fund. If one of their goals was to establish the emergency fund, then they just countered that goal to gamble on a mutual fund, and they are buying the fund when the price is high!

If you treat investing like a game, you’ll get game-like results. You’ll win some and you’ll lose some. If you use investments in concert with an overall financial strategy determined to meet specific objectives, then you’ll accumulate money and assets as you steer a steady course toward realizing your financial desires.

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