When I started investing in mutual funds and stocks, it was just an “activity”. I used to buy financial securities and thats it. For me this was investment. I continued to invest like this for almost 2 years.
I started my investing journey in year 2008. In those days I saw SENSEX touch 20,000 levels and then touch 9,000 in just 12 months. It was perhaps the worst decline SENSEX saw in decades.
No matter how bad was the market, but I managed to learn two things, what is bull market, and what is bear market. Apart from this, I knew nothing about investment.
In those days, I always used to wonder, how I will know when bull market has started and when bear is creeping in. I used to ponder and worry. Full stop.
Every day I was only checking price movements of my stocks & mutual fund holdings. If this is what is investment, it was not cool at all.
To top it all, every time the SENSEX jumped, I too used to jump on my feet to “buy”, expecting higher gains in next days. Similarly, when SENSEX dropped, I used to wonder and sell my holdings in confusion to minimize losses.
It will not be wrong to say that I was driven like frenzy by the market. It was more stressful than India-Pak cricket match.
Then one day I asked myself, are you investing or gambling?
The kind of actions I was taking with my holdings, had more similarities with gambling. So I decided to re-start all over again.
Today I know that investments are not something that is meant to give stress to the investor. Instead, it must help to cool ones nerve. But the way I was investing in my early days was the problem.
Then one day I asked myself a second question, why are you investing?
The quick answer was to “make money”. But thankfully at that time I was reading a book that answered this question quite beautifully in a one liner:
“You are investing money to have the right amount of money at the time of need”
This is it, I had no goals. I was not practicing goal based investments. This was a mistake.
For all investor, the starting point should be to first fix the investment goals.
Identify your financial goals
This was the moment when I started thinking about what life requires from me in times to come. What my personal goals going to cost me?
I will share the goals that I set for myself. I am sure different people will have different goals. But surprisingly they are very similar.
Take my financial goals as an example and fix some for yourself.
Goal 1 : Building Emergency Fund
Why I thought of building my emergency fund? This was a result of my personal experiences.
I used to keep mutual funds, stocks and fixed deposits in my investment portfolio. My target was to keep growing my investment portfolio gradually.
But instead of growing, it was ultimately getting consumed for other needs. Mostly these needs were of emergency in nature.
As I was not planning well to meet emergencies, it was ultimately consuming my investment portfolio.
So I decided to reduce my investment funding, and divert the funds to build big enough emergency fund.
My emergency funds keeps savings for the following needs:
- Savings to pay annual premium for car insurance.
- Savings for house repairs
- Savings for small medical treatments
- Savings to pay annual premium for medical insurance.
- Savings to pay annual premium for life insurance
On an average, I divert 20% of my income to build emergency fund.
My preferred investment options: (1) Recurring Deposit & (2) Insurance
Goal 2 : Saving for a new car
I have kept a goal for myself that every 6 years, I will change my present car.
I am a car fan and I have understood that it is better to accept this fact. Ignoring this ‘strong temptation’ neither keeps me happy nor it can be avoided.
When I know that I can buy a car only after 6 years, this way my temptation-surges are also kept in control.
Moreover, I get enough time to plan the purchase of my new car. This small exercise keep me motivated all the time.
At the moment I have a nice hatch-back. In next couple of years I plan to have a big SUV, 4WD for myself. This is one of those goals which fuels my life.
I know it is not an essential requirement, but I still want to keep it as my goal. It keeps me alive and ticking 🙂
On an average, I divert 7% of my income to invest for my new car.
My preferred investment options: (1) Equity mutual fund & (2) ETF
Goal 3 : Buying a home for self occupation
This is one goal that I have achieved. So I will speak of how I planned its purchase.
It may sound tough, but today I thank myself millions times that I did it this way.
A lot of people even commented that I am “delaying” my home-buying decision. But I was firm on my stand.
I promised to myself that I will buy a home for myself only when I have 35% money in my savings to make the down-payment.
It took me close to 12 years to build this size of fund. But in the process of doing it, I learnt several important things to manage loans.
I learnt about home loan prepayments, that today drives me towards my ultimate goal of financial independence.
But more than this, when I paid 45% of home cost as down-payment (my helped me with balance 10%), I managed to keep my EMI low.
But more important than prepayments and low EMI is, to give a target to self that at least 35% of home cost will me paid from self contribution.
This was one goal which I set and have achieved. So I know its power and effectiveness.
How I build my funds for home down-payment?
On an average, I diverted 3.7% of my income to invest for my new home.
My preferred investment option was: (1) Large cap equity mutual fund.
In a span of 12 years, my mutual fund holding gave me close to 14-15% annualized return.
Goal 4 : Saving for higher education for my child
I am fortunate that I have realized this requirement form the day my child was born.
I will need those funds approximately when my child will be 16-17 years of age.
This is one financial goal that gave me ample time to build the corpus. Hence I had the liberty to take more risks to achieve this financial goal.
It also came to my mind that this is one financial goal which is un-compromisable. Hence I was kept pondering that should I take big risks in realization of this goal?
Though experts would have advised me to take a balanced risk in this case, but I decided to go aggressive.
On an average, I divert 2.5% of my income to invest for future education of my child.
My preferred investment option was: (1) Diversified equity mutual fund.
Goal 5 : Building a sufficiently big retirement corpus
I have already written a separate blog post on how to identify how big should be ones retirement corpus. So I will just leave a link here to that blog. Before reading further, I would like you to read that post first.
Retirement for me is not a traditional 60 years age retirement. I want to retire when I am 45. So I am planning to build a sufficiently big retirement corpus by the time I am 45.
On an average, a person will require minimum 20 years to build a sufficiently big retirement corpus. Hence it is essential to start as early as possible.
On an average, I divert 9% of my income to invest for my retirement goals.
My preferred investment option is: (1) Balanced equity linked mutual fund (2) Direct stocks which pay decent dividends.
Before investing your first dime anywhere else, first fix your investment goals. Practicing goal based investment has huge advantages.
There are several tools available on internet that helps people to fix their investment goals. I have personally build a SIP calculator for my myself.
I often use this SIP calculator to fix the amount of money I need to invest each month to reach my financial goal.
This calculator gives me immense clarity about how much I need to set aside each month.
To formulate a practical goal based investments plan, use to such calculator proves more than handy.
I keep tweaking my financial goals every year. Based on the current circumstances, some new goals gets added to the list, some old gets less priority, or some existing ones needs more attention.
To practice goal based investments, it is equally essential to keep reviewing ones goals once every year.
Fixing financial goals for self, and making investments accordingly, will always keep you in control of your actions.
Market movements will not scare you. You will never be confused about your decisions. Instead, practicing goal based investments will make you so skillful and scuttle that you will you will feel proud to start calling self as a “successful investor”.
Have a happy goal based investing life.