Guide On Who Should Consider Goal-Based Investing


Conventional asset allocation can be contrasted with goals based investing, which links individual investment portfolios to the achievement of certain objectives. It is important to customize the distribution towards achieving a specific goal by setting up a separate portfolio for every goal, and each one has a distinct risk profile and time horizon than the others. Investors are prepared to take varying degrees of risk depending on the specific goals they wish to achieve.

Consider the scenario of an investor who is interested in putting money away for their golden years while also seeking money to go toward the purchase of a second home or vacation estate. These conflicting aspirations come with distinct time horizons as well as degrees of importance; the level of risk that really is acceptable for purchasing that vacation home in 2 years would be different than the level of risk that is acceptable for retiring in ten years. This is where goal based investing comes into the picture. 

Determine the Precise Amount Needed to Achieve Your Financial Objective

When you invest based on your goals, you will make a list of the goals you want to accomplish, the date by which you want to accomplish them, and the amount of money you would need to do so. And while you are doing so, you will examine the existing cost of accomplishing that goal as well as any increases in the price of doing so.

For illustration of the goal based investing, let’s say you want to start thinking about your child’s post-secondary education ten years from now. At the moment, the price is 10 lakh rupees. When you make plans for it, you will figure out how much it will cost in the future by calculating the current price and multiplying it by an inflation factor. If we make the assumption that the overall rate of inflation in education is 8% per year, then the price will be close to Rs. 21.6 lakh in ten years. You are now aware of the number of financial resources required to accomplish this objective.

Better decision making

In addition, it can assist in the establishment of discipline and the promotion of improved investment decision-making. Rather than basing investment selections on what is taking place in the markets for more than a short period of time, this focus has shifted in recent years to be more about the achievement of specific goals in conjunction with the individual’s own risk tolerance. When there is a high level of short-term unpredictability, investors are much more likely to be subject to cognitive biases, which could also lead to poor investment decision-making. This is especially the case at times when the markets are turbulent. It has been proven that if investors concentrate on longer-term investing objectives rather than short-term market sentiment, they are able to make better judgments because they are able to mitigate these biases.

Evaluating expenditures is vital

Before you get started with your investment, you will need to evaluate your monthly income as well as costs and come up with a number that represents the amount of investible surplus you will have. Whenever you conduct this exercise, you could come to the conclusion that not all of your goals are attainable with the surplus of investible funds that you have. Therefore, you might strive to grow your investment surplus, delay the goal’s completion, or perhaps abandon it entirely.

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Creating a detailed plan of all of your requirements enables you to see your financial situation more clearly. Goal based investing  can assist you in finding the answers to critical issues such as how much money to invest, where and how to invest it, or when to begin investing. In addition to this, it provides you with a reason to continue holding onto your investments. And assists you in overcoming the greatest challenge you face: controlling your impulses.