Goals based investing in 2021

If your idea of investing is something akin to Gordan Gekko screaming about Yen futures into two phones than nothing written below is going to appeal to you. As long-term investors we know that doing nothing is almost always the best course of action. Following your plan and letting the power of compounding work its magic is the boring, yet effective, path to financial freedom.

That doesn’t mean sticking your head in the sand. There are certain occasions when it makes sense to take a step back and assess where you stand financially. The beginning of the new year is one of those times. Below is the first of three steps to take this January to make sure you are on track to achieve your financial goals.

Define or reassess your goals

There are countless ways to invest, but many investors do themselves no favours by failing to ask the most important questions first: What are my objectives? Why am I investing? Rather than an academic exercise, taking a goals-based approach ensure you have the structure needed to help you achieve your goals. Remember that is the actual point of investing in the first place. Defining your goals allows you to calculate the required rate of return needed to get from where you are, to where you want to be. Knowing your required rate of return lets you answer two of the fundamental questions that vex all investors; 1) Is my portfolio allocated to the right asset classes to achieve my goal; 2) How am I tracking against my goals and do I need to make adjustments?

For those of you who haven’t defined your goals now is the time to do it. Use that start of the year optimism and energy to take the initiative to define your goals. Unlike your solitary trip to the gym for the year, this exercise will have a lasting impact for years to come. If you haven’t set your goals yet we have some resources to help you out:

• Goal setting webinar
• Why goals matter
• Morningstar Portfolio Construction Guide
• Rate of return calculator

Calculate the required rate of return

Setting goals can be intimidating, but don’t worry, they are not set in stone. For those of you who have already set one, or multiple goals, it is a good time to reassess them. Two things are more likely than not to have changed since the last time you reassessed your goals – your portfolio has fluctuated and time has ticked away until you want to achieve your goal.

There might also be changes in your financial situation that may impact the amount you can save and invest. Any change in those variables will mean that your required rate of return will be different than when you originally set your goal or the last time you reassessed it. 

Assess the feasibility of your goal

Once you’ve recalculated your required rate of return you can assess if you are on track to meet your goals. If the return needed to achieve your goal is higher than the last time you checked than you might be falling behind. This is where the degree of the change matters. Small fluctuations should be expected and can be chalked up to the volatility inherent in investing. However, if the change is measured in percentage points rather than fractions of a percent you might need to reassess. 

Perhaps you need to save more or lower your expectations. Perhaps you need to extend the time horizon until you want to achieve your goal. Go through some different scenarios using a financial calculator or our goal setting feature. The other option is to check the asset allocation of your portfolio and shift some additional funds into riskier assets.