How to determine your investment goals

Having a goal makes building a portfolio a lot easier
Thursday 14 Sep 2017 Author: Emily Perryman

Having a financial goal is an important first step when it comes to investing. It can be tricky to determine what your goal is, so we’ve come up with a few ideas and some accompanying investment strategies to help you on your way.

Why do I need a goal?

There are lots of reasons why it is important to have an investment goal.

From a psychological point of view, having a goal makes it easier to put money aside each month. If you’re just saving for a rainy day you might be tempted to dip into your savings, whereas if you have a specific goal making small sacrifices, like cutting back on eating out, can seem more worth it.

Setting a goal will help you to decide how long you need to invest for.

‘The timescale around your investment goal will determine the type of investment required and whether or not you are prepared to take any element of investment risk,’ says Alex Edmans, head of product at Saga Money.

For example, a 30 year-old saving for retirement will be able to take more investment risk with their money and tie it up in longer-term investments than a 30 year-old saving for a holiday within the next few years.

Joshua Gerstler, financial adviser and company director at The Orchard Practice, says unless you have a goal you won’t be able to assess the performance of your investments.

‘You should at least know if you are investing for income or growth,’ he says. ‘If the income from your portfolio increases by 10% and the valuation drops by 10%, how do you decide whether this is good or bad if you do not know what your end goal is?’


What if I don’t have a specific goal?

Some examples of investment goals are saving for retirement, a house deposit, a wedding, a dream holiday, a loft conversion or your children’s education.

A lot of investors simply have a goal of ‘investing for the future’. Neil Adams, head of pension planning at Drewberry Wealth, says although there is nothing wrong with this, it can be less rewarding – and so a lot harder – than saving towards a specific goal.

He suggests trying to break down your goals into clear achievable targets with finite timespans.

‘Most of us do better when we break down challenges into smaller, more achievable targets and this is especially true when it comes to saving towards a future goal,’ he says.

‘It’s far easier to think in terms of saving, say, £250 a month for three years than it is to set out to save £10,000 in one go.

‘This approach means that you meet a series of smaller goals along the way rather than just saving endlessly toward a finishing line that could be years in the future.’

Edmans recommends thinking about your lifetime plans and aspirations for the future and whether these require a financial commitment.

‘For example, you may wish for your children to go to private school and so saving for school fees will become a goal. Alternatively, you may wish to spend your retirement travelling, in which case reviewing pension plans and making sure that you are well-prepared for your retirement will be crucial,’ she adds.


How do I save for short-term goals?

Short-term goals tend to be three years or less and include things like saving for a dream wedding or holiday, buying a new car or building up a deposit for a new property.

Ryan Hughes, head of fund selection at AJ Bell Youinvest, says a short timeframe leaves little opportunity for taking risk.

There isn’t enough time to ride out the stock market’s volatility, so if you invest in equities there’s a chance that the market could crash just before you need the money.

This means cash-based savings products tend to be most suitable, despite interest rates being at an historic low.

Can I invest for medium-term goals?

A medium-term goal would encompass anything within the next five to 10 years – perhaps saving up for your children’s university fees.

You can take some element of investment risk but should probably avoid very high-risk investment strategies as there may not be sufficient time to recoup market volatility.

Assets to consider include government and corporate bonds, which can be accessed through funds or exchange-traded funds, as well as lower-risk equities and property.

Hughes says investing monthly could help to smooth out the volatility of the market. He suggests using a Junior ISA and saving monthly into global equities, for example via Fidelity Index World (GB00BLT1YP39), which tracks the MSCI World Index.

How do I invest for long-term goals?

A long-term goal could be building up enough money for your retirement in 10 or more years’ time.

In general, the longer the timeframe the more risk you can afford to include in your portfolio.

Adams says the default position should be to start with a notional 100% exposure to equities and then whittle this down by diversifying into asset classes such as property and bonds, based on your individual preferences.

Within these specific assets you can add risk by investing in riskier regions, for example emerging markets.

Hughes suggests long-term investors consider funds like Baillie Gifford Global Alpha Growth (GB00B61DJ021), Fidelity Emerging Markets (GB00B9SMK778) and River & Mercantile UK Equity Smaller Companies (GB00B1DSZS09).

‘These funds would all work for this purpose and could even work together in a portfolio for a higher-risk investor,’ Hughes says.

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Important information:

These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell Youinvest.

Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.

Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.

The Shares team

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