Everyone wants their investment journey to be successful. Defining your goals can be a helpful way to understand what your approach could be.
Key takeaways
Consider specific, measurable, achievable, relevant and time-bound (SMART) goals for investing.
Tailor your investment goals to your individual situation – think about your age, income, risk tolerance and lifestyle.
Know the difference between short-term (1-2 years) and long-term (5+ years) goals with realistic timelines.
Weigh up the pros and cons of active versus passive investing to match your goals.
Why investment goals matter
Think of developing investment goals like helpful beacons to guide you on your financial journey. These goals can essentially become a roadmap for you to follow. They can also keep you motivated and accountable.
When you reflect on these goals, you may also get greater clarity about where you stand right now, which will, in turn, help you measure your progress and tweak your portfolio as necessary. Ultimately, setting goals can help you become more disciplined and focused and give you a sense of purpose for the journey ahead.
Without a plan, you might also act out of emotion. What if your portfolio dropped 20% suddenly? Having a goal to reflect and assess action can help to mitigate risk or potentially making poor decisions. Whilst no investment goal can eliminate risk completely, clarity can help prevent you acting irrationally.
Consider your personal circumstances
Your investment goals could be tied to your personal circumstances. Things like your age, income, career stage, lifestyle preferences and risk tolerance will all play a part in shaping your financial objectives.
Younger investors, for example, may have a higher risk tolerance if they don't have any kids or a mortgage to pay.
On the other end, those closer to retirement age might want to protect their portfolios and instead focus on defensive shares or creating passive income streams. All these factors will influence the investment path you decide to take.
Short-term and long-term goals
Your short and long-term investment goals will likely also differ depending on a few things.
Short-term goals, for example, are generally those that you can achieve in one to two years. Examples include saving for an overseas holiday, creating an emergency fund or buying a car.
On the other hand, long-term goals can take anywhere from a few years to several decades to reach. They are huge milestones and might include things like funding your retirement, creating a school or university fund for your children, or having a fully diversified investment portfolio that generates a passive income for you.
What kind of investor are you going to be?
When investing, it's worth asking yourself how you want be – active or passive?
Active investing
Active investing is an approach where you buy or sell shares regularly. The goal is to outperform the market and achieve high returns.
Active investors are very knowledgeable about market trends and are across current news and technical analysis to help them make decisions. If you’re an active investor, you might do things like day trading, swing trading or stock picking.
While active investing does give you more control over your investment choices, it can also come with bigger risks due to frequent trading. That could mean more brokerage costs, taxes and the possibility of making incorrect market predictions. Active investing can also take more of your time given the level of analysing and adjusting of your portfolio on a regular basis.
Passive investing
Passive investing is a more hands-off approach so requires less time commitment than active investing. It tends to follow a longer-term strategy where you either grow your portfolio slowly over time or follow market indices or benchmarks. As an example, your strategy could just be to invest in shares and hold them for the long-term without adjustment.
Alternatively you can use index funds or exchange-traded funds (ETFs) to mirror a market’s performance. The decisions on what the pool of the fund has been done on your behalf so you only need to decide how much to invest. This approach takes much less time and effort than active investing, as most of the research and decision making is done for you.
Now you’ve got an idea of the sort of investor you want to be, let’s set some goals.
How to set goals
You first need to know what you want to achieve and how you may look to achieve it.
Start by writing down your goals. Using the SMART framework is all about making your goals Specific, Measurable, Achievable, Relevant and Time-bound.
Here's an example: You want to save $3,000 to invest in a particular ETF within 12 months and keep that investment for two years so you can save for a holiday. This goal becomes SMART by setting a specific amount, measuring your savings progress against it, keeping it achievable, ensuring it’s relevant to your objectives and is time-bound.
How to measure goals
Regularly reviewing and understanding your progress will keep you on track but be flexible and reassess your goals if you're falling short.
Remember that life is dynamic, and your circumstances could change at some point. If your financial situation suddenly shifts, you may consider readjusting your goals. For example, if you suddenly receive a large sum of money or must cover unexpected medical expenses, tweaking your goals may be necessary. Being adaptable will help you maintain realistic goals.