Investing With A Goal

By Alvin T. Tabañag, RFP®
Business Mirror, October 30, 2006
 

I often come across people who ask where they can invest their money. A typical question would be “I have P100,000, where can I put it?” Many individuals who are familiar with various investment products are quick to propose their favorite investment vehicles based either on their personal investing experience or the products they are marketing. Instead of directly answering this query it is more appropriate to respond with a question like “why are you investing” or “what are you investing for?”

Before you can pick the most suitable investment product, you should know first the core reason why you are investing. This means you need to establish an investment goal before you start thinking about your investment options. Investing without an objective is like driving a car without knowing where you want to go.

Having a clearly defined investment goal will allow you to choose the right investment instrument. Just like knowing which particular mall you want to go to allows you to choose the “best” route to get there. Typical examples of an investment goal are building up funds for downpayment for a house or car, saving up for a family vacation abroad, and preparing for your kids college education or your retirement.

Now, there are goals, then there are “smart” goals. Investing to grow your money is not really a good & useful goal. After all, everyone probably has this in mind when they invest. You have to be more specific and clear in defining your objective. For an investment goal to be “smart” it should be specific, measurable, attainable, realistic and time-bounded.

A specific goal is something you can clearly picture in your mind. Say, you want to purchase a house. Try to describe its location, size, style, color, number of rooms & other features which make it your dream house. Having a vivid description of your goal will help you visualize it better. “Visualization” is a technique wherein you attach a mental (sometimes actual) picture of your goal to keep you inspired and motivated and always moving towards achieving it.

For an investment goal to be useful you should attach a specific monetary value to it. If you are investing to fund your child’s college education for instance, determine the exact (or projected) amount of funds you need to accumulate. In ascertaining the amount, be sure to consider inflation and use the future value, not the present value. Just imagine how frustrated you will be if you start saving to purchase a brand-new car that costs P800,000 today only to find out a few years later, when you thought you already have sufficient funds, that its cost has gone up to P1 million.

To save you from unnecessary distress and disappointment set goals that are attainable and realistic. Planning to retire in 5 years with P10 million when you only have less than a hundred thousand in savings at present may be asking for the moon and the stars. Such unrealistic goal is dangerous and can lead you to take on very risky investment schemes that promise (but often do not deliver) incredibly high returns; and you can end-up losing your life-time savings.

Finally, a goal is not a goal unless you put it within a specific time frame. Investing to be rich is not a smart goal. Investing to accumulate P10 million isn’t much better either. You have to set a specific period as to when this objective should be accomplished. Setting a time frame is useful in two ways. First, it helps you monitor your progress towards your goal. Second, having a deadline will keep you working towards your goal; people are known to be more motivated when working against a deadline. Without a time limit you will not have any sense of urgency to act and you will likely fail to attain your goals.

It is recommended that you establish milestones for big investment goals. For instance, if your target is to accumulate P10 million in 25 years, determine how much you should have accumulated five, ten, fifteen and twenty years into your savings & investment program. (You may set an annual target if you wish.) By doing this you can figure out quickly if you are on target and if you’re not, you can take immediate corrective actions (e.g. increase savings or engage in more aggressive investing) to put you back on the right track.

After you have set your smart investment goals you need to determine your appetite for risk before you can finally select the appropriate investment vehicles. Risk associated with investment products can be classified generally into low risk, moderate risk and high risk. Although returns for low risk investments, like time deposits or TDs, are relatively low, these are guaranteed and your capital is preserved. Moderate and high risk investments, like mutual funds, UITFs and stocks, do not have guaranteed returns and you can lose part of your capital. However, the potential returns for these investments are considerably higher.

If your gut turns inside out with even the slightest decrease in the value of your investment, you are better off taking refuge in the relative “safety” of low return but low risk investments otherwise you’ll suffer a nervous breakdown. But you have to realize that it may take longer for you to reach your target with such a conservative approach to investing. And if you want to stick to your timetable but unwilling to take on certain risks you will have to more than double-up on your savings. Consider this trade-off.

Investing in itself is already hard because of uncertainties in the market. Don’t make it any harder by setting out without a clear goal in mind and without knowing how much risk you can tolerate.

Alvin T. Tabañag is a registered financial planner and a member of the RFP Institute and the Financial Planning Association (USA). He is the founder and training director of Advantage Plus Consultancy & Training, which is dedicated to promoting a culture of savings among Filipinos through financial education. Comments & questions about the article and other queries maybe emailed to info@pinoysmartsavers.com or alvintabz@yahoo.com

Please check:
www.businessmirror.com.ph and www.rfp-philippines.com.

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