If you’d asked 22-year-old Emma why she started investing, she’d say to ‘to make more money’. Turns out she wasn’t so different from the average investor.

New research from challenger online broker Superhero this week shows half of their customers first invested in the stock market to ‘turn money into more money’. ‘Diversify my assets’ was ranked number two, with 18% of the vote, followed by build a nest egg’ in bronze with 14%.

‘Make more money’ is a completely reasonable response to the question 'why do you invest', and I believe given in all honesty. But I don’t think it’s a terribly useful answer. It’s an answer that isn’t an answer. It’s like saying you run because you like moving forward at speed, or you like sleep because it’s restful. Everyone invests to make more money, why else take the risk?

Source: Superhero

Aimless investing clashes with the goals-based investing Morningstar subscribes to. This strategy asks first-time investors to develop a set of goals and prioritise them before they start thinking about which stock or ETF they’d like to buy, or which company is a possible 10-bagger. The investment decisions are driven by the individual’s needs and goals, and progress is measured against these, rather than focusing on generating the highest possible return or beating the market. For example, someone whose goal is to retire in 5 years structures their investments with an eye to liquidity and risk aversion.

A goal-based framework in financial planning led to a 15% increase in investor wealth, according to a 2015 paper by David Blanchett, head of retirement research for Morningstar’s Investment Management group. Investors gained a sense of motivation and satisfaction with their plans when focused on personal goals over arbitrary parameters. It also reduced impulsive decision-making and overreacting to market volatility. But, as anyone who’s committed to getting fit in January knows, goals need to be concrete and achievable. Vague objectives like ‘make more money’ or 'be as rich as possible’ lead to poor decision-making, nudging us to blindly chase the highest possible returns, the latest hot trend or the best performing funds, or on the downside, panic in times of crisis, placing the focus on the account value rather than a quantifiable long-term goal.

So, how can we set goals that are meaningful to us and reflect our motivations? Many people don't set goals because it's difficult. When faced with a question like 'what are your long-term goals' we tend to obfuscate, say what's top of mind or easy to recall. In 2018, Morningstar conducted an experiment to see if a simple behavioural nudge could help investors better identify what was really important to them. They came up with a list of common objectives to inspire and guide investors. Here's the list:

If you didn't connect with any of these, here's another way to quantify your financial goals. Goals should be SMART: Specific, Measurable, Adaptable, Realistic and Time-bound

  • Specific: well-defined, clear, and unambiguous.
  • Measurable: with specific criteria that measure your progress toward the accomplishment of the goal.
  • Adaptable: adjustable (if needed) in your regular portfolio review.
  • Realistic: within reach, realistic, and relevant to your purpose.
  • Time-bound: with a clearly defined timeline, including a starting date and a target date.

When I defined my investment goals it made me feel centered, as if I had a foundation for tackling all the difficult decisions I need to make. It allowed me to calculate the return I needed to achieve my financial goals and select investments to suit. I went from ‘make money make more money’ to a set of concrete short-term and medium-term goals including ‘Be able to go on an overseas holiday once a year’ (man I’ve saved a lot over the last two years) and ‘Buy an apartment in 5-years with a 10% deposit’ (I achieved that one last year).

Finally, it’s important to remember that nothing is set in stone. As you change, so will your goals. Your first set of goals is a baseline, a jumping-off point to get you thinking, and a method by which you can measure your progress. As Morningstar’s director of personal finance Christine Benz says, starting out without a set of goals is like starting your day without a to-do list:

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