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3 Reasons Why Goal-Based Investing Is Great

The best shortcut to great investing behaviour is, without a doubt, goal-based investing

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If there’s one thing that COVID-19 taught us about investing, it’s that investing behaviour is a much bigger determinant of long term returns that investment returns. When fear and panic gripped investors in April ’20, they redeemed in hordes and booked losses – only to sit on the fence as the stupendous rally unravelled! The best shortcut to great investing behaviour is, without a doubt, goal-based investing. Here are three lesser-known benefits of “beginning with the end in mind”.

Correct Asset Allocation

How, you might ask, can the simple act of planning for your goals lead to the achievement of an optimal allocation between low risk, low return and high risk, high return assets? The reason is simple – when a goal is a long distance away, the monthly saving requirement tends to be smaller. When the quantum of money being committed is small, we tend to be more courageous with respect to our choice of assets. Hence, long term moneys tend to flow into higher risk, higher return asset classes such as equities by default.

Take for instance, a saving of Rs. 5,000 per month for a retirement goal that’s 30 years away. Would you not be more comfortable with investing into a small cap fund for this goal? And now, what about a car purchase goal that’s just a year away, and for which you need to stack away Rs. 20,000 per month? You’ll obviously – and rightfully – be more risk averse.

Guilt-free spending

What’s the point of toiling hard all month for a pay check, only to feel guilty every time you decide to spend a portion of it on yourself? Anecdotal evidence suggests that those with goal based financial plans in place feel a lot less guilt while spending money on themselves. Knowing that your discretionary spends aren’t damaging your retirement years - or your child’s future - can be a balm while you spend! Putting your goal-based savings on auto-pilot will silence that subconscious chatter that’s holding you back from truly enjoying the fruits of your labour. The result? An enhanced happiness quotient!

Better Investment Decision Making

If you’ve spent any more than five years as an investor, you probably know by now that you’re your own worst enemy when it comes to making sound investment decisions. Indeed, exploratory studies in behavioural finance are uncovering stunning truths with respect to the devastating impact that our own biases can have on our investment portfolios eventually. The massive inflows of retail moneys at the cusp of stock market crashes might serve as examples of this phenomenon; but truth be told, there are several more ways in which poor money-decisions chip away at our future financial success. 

It might surprise you to know that having a goal based financial plan in place (and sticking to it resolutely!) might serve as a silver bullet for most investment-related mental maladies. Investing with a purpose and with a plan automatically enhances your decision-making skills. You transmogrify into a more passive, long term investor who benefits from rupee cost averaging and compounding. You don’t get unduly disconcerted by market corrections. You switch off the TV and stop getting harangued by the constant flow of ‘bubblespeak’ or ‘bullspeak’. In other words, goal-based financial planning has the hidden power to transform you from a panic-stricken novice-market-dabbler into a mature, level headed Buffet-esque investor. The end result – lower transaction costs, an increased potential for wealth creation, and lot’s more mental peace.

Have you prepared your goal-based financial plan yet? If not, you’re missing out. Start now.

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