How to Set Investment Goals

September 16, 2022

Want to get started investing but don’t know where to start? A good place can be the reason why you want to invest. What are your goals? 

With a clear goal in mind, investors can create a realistic plan.

Why Set Investment Goals?

A common mistake investors make is confusing investing with stock picking. The rise of meme stocks and cryptocurrency has led many investors to view investing as a way to make quick, easy money. Most investments do not fall into that category.

Behavioral economics tells us that acting on “get rich quick” impulses tends to not end well. Instead, behavioral economists have determined that the most successful investors are those who start with a specific goal corresponding to a set time horizon.

Once investment goals are set, investment planning can begin. How much savings can you devote to investment objectives? How realistic is your goal? How much time do you have? If you choose to work with a financial advisor, they can help you find the answers to these questions.

How to Determine Your Investment Goals

Define the Purpose of Your Investments

Some of the most common financial and investment goals include retirement, nest egg funding, family planning, education planning, and planning for life events.

Everyone’s goals will be different depending on their individual circumstances. 

Identifying your own personal goals will help you prioritize investments and determine a strategy.

One popular method to think about goal setting uses the acronym SMART:

  • S – Specific: Goals should be detailed and clear.
  • M – Measurable: Goals should be easy to track in order to determine if you’re on target or falling short.
  • A – Achievable: You should have the ability to reach your goals.
  • R – Realistic: Goals shouldn’t be far-fetched dreams.
  • T – Time-based: Know when you expect to meet your goals.

Choose a Strategy

Once they know their financial goals, investors can choose an investment strategy that correlates with those goals.

There are several approaches to investing, all with different objectives and intentions. Some include:

  • Growth
  • Wealth-maintenance
  • Cash flow

Many investors put money into the stock market to grow their wealth, while others are looking only to preserve their wealth.

Growth investing involves buying higher-risk stocks and bonds that have the potential to offer greater returns. It can also mean purchasing appreciating assets, such as real estate, contemporary art, and precious metals.

Most growth investors have a long time horizon for their goals, accepting more short-term fluctuations in their portfolio’s value in favor of greater long-term returns.

By contrast, those looking to preserve their wealth often have a shorter time horizon before their goals need to be met. Preservation investing involves low-risk assets, not wanting to risk a decline in portfolio value.

Lastly, some investors are looking to boost their current cash flow instead of saving for a short- or long-term goal. These investors tend to choose types of investments that provide dividends such as real estate, bonds, or dividend stocks.

Determine Time Horizon

Investing to save for college or a down payment is going to have a very different time horizon than investing for retirement.

Having a variety of goals with different time frames is completely normal. So give yourself time to prioritize the goals that are most important to you and are based on when you want to see returns.

With longer-term goals like retirement, it’s best to start sooner rather than later, even if it means starting with a smaller amount of money. The power of compound earnings will intensify over time, so by starting small today you could still have money accumulating in the background. 

Figure Out Risk Tolerance

Risk tolerance is your ability and willingness to handle a decline in the value of your investments.

When determining your risk tolerance, ask yourself how comfortable you will feel maintaining your positions in a bear market or in periods of high volatility.

Conservative investors are often focused primarily on the preservation of capital and the avoidance of downside risks. That often means lower returns, but the investor will settle for that in exchange for avoiding any major swings in value.

Aggressive risk investors tend to allocate a large portion of their portfolio to riskier assets such as stocks and real estate. Riskier assets are those which experience higher price volatility.

Moderate risk investors fall in between the previous camps. A classic example includes the traditional 60/40 allocation between stocks and bonds. Most investors fall into the moderate category and focus primarily on portfolio diversification.

Choose Investments That Align with Goals

Once you’ve identified your risk tolerance and the time horizon for your goals, you’ll have to choose the best investment plan for each goal. Using the same investment strategy for different goals often doesn’t work due to differing time frames.

Working with a financial advisor to determine a financial plan for your specific goals and overall wealth management can help you make the smartest investment decisions.

If investing for short-term goals, investors often focus more on preserving their money than growing it. This is because there is less time to make up for any losses due to volatility.

For goals that are a bit further in the future — medium-term goals — investors are generally able to take on more risk.

Goals that are beyond five years are generally considered long-term, which can allow you to take on additional risks in your asset allocation. Some long-term goals, like retirement planning, may be decades in the future which gives you plenty of time to make up for any losses that may occur.

Hard assets such as collectibles and real estate are also considered long-term investments because their value slowly increases over time, as opposed to being determined by traditional markets like equities and bonds.

Bottom Line

Setting goals may feel daunting, especially at the beginning of your investment journey. While there are the occasional stories of day traders who make millions overnight, that is not the case for the vast majority of investors.

Most reasonable investment goals could be achievable with steady and consistent returns from a well-developed portfolio allocation. This is why it’s important to define realistic goals, assign a strategy for each goal, and continue to monitor your progress over time.

This material is provided for informational and educational purposes only. It is not intended to be investment advice and should not be relied on to form the basis of an investment decision

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