We often think of investment goals in terms of one single investment strategy. In reality, reaching your overall financial goals requires several strategies, each tailored to a specific goal. With the current uncertainty around residential property investment, the ‘one size fits all’ approach to reaching financial goals often becomes redundant.
Factors that influence all financial goals
Various factors need to be considered in connection with any investment strategy, including risk tolerance, portfolio size, and your overall financial situation (which reflects the balance between income level, income stability, non-investment savings, cost of living and debt levels).
But these are general considerations — in order to get more specific with your planning, you need to focus on two primary factors.
With those two factors at the front of your mind, here's how to leverage your goals to create a tailored investment strategy.
We tend to think of financial goals as being long-term in nature, but it is more likely the majority of them are actually short-term goals that contribute to an overall end result. In other words, achieving your long-term financial goals is best served by completing a series of smaller, short-term goals along the way.
How you invest your money to reach your short-term goals will be very different from how you would invest towards medium- and long-term goals. Short-term financial goals tend to be recurring, so you’ll probably be working towards one or more of these at any given time. As your need for cash will be fairly immediate — within one or two years — you have to be conservative with your money.
Common short-term goals include:
To reach short-term goals, you can't afford to invest in higher-risk assets that have the potential to take a big loss that you won't be able to recover from in time to meet the goal.
Your primary strategy will be to avoid losing money, so you probably don’t want to invest your money in anything riskier than money in the bank – despite the very low interest rates, which show no signs of changing anytime soon.
Medium-term financial goals are generally at least two years in length but not more than ten years. Some examples of medium-term financial goals include:
Medium-term goals force you to balance growth with safety of principal, so in a very real way, the timing of each goal determines your investment strategy for it.
For example, if one of your children will be going to university in two or three years, you’ll want to stay with more conservative investments, such as interest-bearing assets. On the other hand, if you’re planning on retiring in ten years, you may want to take more of a middle-ground approach. To achieve this balance, you'll need to invest a portion of the money in growth and income type assets, with a smaller position in growth assets.
For most people, the ultimate long-term financial goal is financial independence - particularly if you are in your twenties or thirties and have decades to prepare.
Other long-term goals could include future education funding for a younger child, leaving paid employment and buying or starting a business, or paying off your 30-year mortgage in a shorter time frame.
Long-term financial goals are almost easier to build an investment strategy around because you have a longer period to save towards the goal. You also have more options, as short-term drops in the value of your investments are no longer the dominant factor. The greater concern is investment growth, which is the vehicle that enables you to reach long-term goals.
When you’re working towards a long-term goal, your investment strategy will favour long-term growth. This can include local and international shares and other assets such as listed property or direct investments like residential property.
Inflation is another factor when it comes to long-term investing. Though it may not be much of an issue when thinking about short-term goals, inflation is always a factor for investments that are held over decades.
Fixed-rate investments simply do not pay enough of a return to cover inflation and to grow your investment portfolio in real terms. Your investments will have to account for inflation, and that will require substantial exposure to growth assets such as shares and property.
The most relevant factor in determining your investment strategy for virtually any goal is how much time you have to prepare, save and invest.
If your investment goals have a long-term horizon, the current uncertainty around sharemarket, property and other growth-focused investments should no longer be an issue for serious concern.
