Practicing goal based investment is a must

Investments cannot be effective until they are bought with purpose. Hence, practicing goal based investment is a must. When I started investing in mutual funds and stocks, I did it because it was a right thing to do.

I used to buy and sell financial securities, and that’s it. Frankly speaking there was no specific purpose or goal in mind. For me this was investment.

I continued to invest like this for almost 2 years. But then something happened and it gave me few insights about investment and market as a whole.

I am talking about a period of 2008-09. In those days we saw SENSEX touch 20,000 levels and then bottomed to 9,000 points in next 12 months. It was perhaps the worst decline SENSEX saw in decades.

No matter how bad was the market, but it taught me two important things:

  1. What is bull market, and
  2. What is bear market.

Though these concepts were not alien to me, but when I saw them happening right in front of my eyes, something changed inside me.

How I was investing before

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’s 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”. This was done with an expectation to earn higher gains in next days.

Similarly, when SENSEX dropped, I used to wonder and sell my holdings in confusion. Why? To minimise 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. Then came the first signs of change…

First sign of change…

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.

“The way” I was investing in my early days was the problem.

This realisation was the trigger, and it helped me to start asking right questions about investment.

The question that changed my whole look-out of investment was this:

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”.

“Having right amounts of money when needed” – this is nothing but our financial goal.

This is it, I had no goals. I was not practicing goal based investment. This was a mistake.

I had to fix my financial goals. So I started with the first essential step…

Identifying Financial Goals

Goal Based Investment - Flow Chart2

This was the moment when I started thinking about what I need to achieve in my life in times to come. I started to count, and the list became like endless. For sure I will not be able see all achievements.

But I picked five (5) goals which was like uncompromisable for me.

I am sure different people will have different goals. But surprisingly they are often very similar. You can take my “non-compromising” financial goals as an example and fix some for yourself.

Allow me to elaborate a bit on my financial goals. It will give you some insights about how to practice goal based investment.

#Goal 1 : Building An Emergency Fund

Goal Based Investment - Emergency Fund

Why I thought of building my emergency fund? This was a result of my personal experiences.

I used to keep only 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. Why this was happening?

Because I was not planning well to meet emergencies. Emergency cannot be avoided. It will keep striking at unknown intervals and will demand financial assistance.

As I was not maintaining an emergency fund, to meet the needs of emergency, I had to dig into my investment portfolio. As a result, instead of portfolio growing, it was only diminishing.

So I decided to reduce my investment funding, and divert the funds to build big enough emergency fund.

Following are the needs which gets funding from my emergency corpus:

SLEmergencyEmergency ExpenseEmergency Portfolio
1Car DamageInsurance PremiumCar Insurance
2House RepairsSavingsRecurring Deposit
3Minor Medical TreatmentsSavingsRecurring Deposit
4Major Medical TreatmentsInsurance PremiumMedical Insurance
5Life ProtectionInsurance PremiumLife Insurance
6Misc. ExpensesSavingsSavings Account

On an average, I started diverting 20% of my income to build and maintain my emergency fund.

Read more:

#Goal 2 : Saving for a new car

Goal Based Investment - NewCar

I have kept a goal for myself that every 7 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. How it helps?

After realising that I can buy a car after 7 years, my temptations remained in control. Moreover, I was getting enough time to plan the purchase of my next 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 nice sedan 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 financial 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 based mutual fund &
  2. ETF

Read more:

#Goal 3 : Buying a home for self occupation

Goal Based Investment - Home Purchase

This is one goal that we all want to achieve sooner in our life. It is both necessary, and people also feel passionate about it.

But even after this, lot of people delay their home-buying decision. Delaying is not the solution. But the problem is, it is a very capital intensive purchase.

These days home loans are easily available. So, going for the home loan straight away is the solution? Not at all. It’s better to first build the self contribution amount, then go for it.

How much should be the self contribution? Minimum 40%.

For an average person, it will tale close to 5-7 years to build this corpus. What is advisable is to start building this corpus from the first day in job.

How to build corpus for the home’s down payment? On an average, divert 4% of your income for this cause. Your investment option can be the following:

  1. Multi-cap Mutual Fund.
  2. Large Cap Mutual Fund.

Read more:

#Goal 4 : Child’s Higher Education

I am fortunate that I have realised 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 cannot be compromised in any way. Hence I was confused about taking big risks in realisation 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.
  2. Balanced Mutual Fund.

Read More:

#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 have taken retirement when I was 40. So my plan was to to build a retirement corpus which was very different from what normally people plan for. Read more about how to retire early from Job in India

On an average, a person will require minimum 20-25 years to build a sufficiently big retirement corpus. Hence it is essential to start as early as possible.

Divert at least 5% of your income to invest for retirement. This is in addition to your EPF contributions.

My preferred investment option is:

  1. Balanced mutual fund.
  2. Dividend paying stocks.

Conclusions

Before investing our first dime anywhere else, it’s better to first identify the financial 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 will also suggest you to read this article on how to avoid overspending.

I often use this SIP calculator to fix the amount of money I need to invest each month to reach my financial goal.

I keep tweaking my financial goals every year. Based on the current circumstances, some new goals gets added to the list. Some old one gets less priority, or some existing ones attracts more attention.

To practice goal based investments, it is equally essential to keep reviewing ones financial goals once every year. Read more about how tough financial goals needs higher investment risks

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.

Practicing goal based investment will make you more skilful and scuttle.

Have a happy investing.

Suggested Reading: Breaking down financial independence in stages can help achieving it

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