Importance of Goal Based Investment

Life is filled with desires and ambitions. A holiday abroad, a luxury car or a Big home, whatever it may be, we earn money to fulfill such goals. However, very often, when it comes to saving for our goals, most of us make investments without a proper plan. We buy financial products, without giving much thought whether those products will help us at the right time when goals are to be met.

This is where a goal-based investment plan makes right sense.
The concept of goal-based investment focuses on having a planned and disciplined approach in saving money for the important goals of life. By having an investment plan defined around your goals, you could allocate your finances to the right asset class, so that they are readily available to meet the big expenses of life. There is very high possibility of reaching your goal if the investments are properly linked and you stay committed .As most of the experts say “Being a Committed Investor is more important than being an Interested Investor” 

But the biggest challenge for the investor is to understand and decide on the Investment goals and most of them are unable to do it. The importance of doing it well and the pitfalls of doing it badly are illustrated below

 
My personal Experience:  

Example 1: In 2008, when I was undergoing training for LUTCF Certification, I happened to meet one trainer from an Insurance company. He was 53 years old. He used to tell everyone that he had planned for all his goals and he is going to retire at 55 itself. Inspite of having good understanding of various Investments, he was unable to figure out whether he was on right track or not.  He had more investment done in equity Mutual funds (Infra Fund, small and mid cap fund)   . In 2009 he was hospitalized and was not in a position to work for next 6 months. His financial life took a Big U- Turn .After seeing his experience I could realise the importance of Asset Allocation and Importance of Goal Based Investing. He simply failed to keep provisions for medical emergencies & Regular Monthly Household Expenses for 6 months. When he was actually in need of money, he could not liquidate his investments because his portfolio was down by 60%. Inspite of him being in Finance Industry, he failed to link his investments for any goal. Infact his case was the simplest case; many investors have much complex goals . Lesson what I learned from the above incident was, Investing without understanding the need or goal is of no use.
 
  Example 2 :  Goal based approach should not be restricted towards investment itself  . It can be practiced or can be followed in our day to day activity. The process which I am going to tell you would have been already in practice in your family. The solution is Bags/Covers/Purse.
My grandmother used to save money and she used to keep all her savings in different covers based on the requirement, Small cover for Yearly school funding and big cover for marriage funding. My mother currently keeps monthly expenses in different purses. She has a purse from which household expenses are taken , one purse for milk and maintenance  , one for vegetable maintenance and one for saving , which in turn she parks in liquid fund and withdraws in case of any contingency (i.e. Unexpected Expenses)  . While financially sophisticated readers will call this system as primitive and sub optimal, it has got lot going for it. It is a simple system, easy to implement and easy to understand and above all, it worked. Most importantly it adopted one of the golden rules of personal investment management – separate folios for separate goals.
 
I would end up by saying, A true advisor would always help his/her client in setting SMART (Specific, measurable. attainable, realistic and time bound) goals. Though there is No guarantee whether the goals will be achieved with the amount you save , because lot of factors needs to be considered and certain factors are not in any once control like inflation, school fees etc  . But one thing which is guaranteed is the clarity and a clear cut road map for your goal. As the saying goes, “What gets measured gets achieved”, will actually work if we all follow it delicately. 

Article by Nishith

Things Investors Should Read. Things Investors Should Avoid…

This is Warren Buffett's office at Berkshire Hathaway  headquarters in Omaha, Nebraska.

The portrait behind Buffett's right arm is his father. The file bin at the end of the desk reads "TOO HARD." There are some magazines, a pile of newspapers, and a phone.

But notice what you don't see. There are no stock tickers. No Bloomberg terminals. No charting software. No Twitter feeds. No pundits spouting forecasts. No computer monitors, and maybe not even a calculator. Buffett has created more than a quarter-trillion dollars of value for Berkshire shareholders from this desk over the last 50 years. And he did it while rejecting most of the "tools" investors utilize. We can all learn something from that.

We have more information than ever before. Are we better investors because of it? I don't know of any evidence that we are. In her book Bull!, Maggie Mahar writes: "The problem is that much of the information that investors want -- and think they need -- is just that, 'information,' not knowledge."
Good investors read a tremendous amount of information, of course. They're just more selective with what they read and pay attention to.

Here are few ways to become more selective.

Avoid explanations of random events. Pay more attention to historical context.
 
People can't stand the idea that events are random and unexplainable, so they try to attach meaning. You'll see things like, "Stocks fall 0.5% as investors react to manufacturing data" rather than the more honest, "Stocks fall 0.5% because they just do that sometimes."

Instead of reading explanations of what the market is doing, pay attention to what the market is doing in a historical context. The next time stocks have a down day, remember that they do that, on average, every other day. The next time stocks decline 10% from a recent high, remember that they've done that almost every year since the Civil War. And the next time we have a recession, remember that no one in history has made it to the 5th grade without living through at least one recession.

Trying to explain market moves gives us the impression that we can predict the future, which we can't. Looking at market moves in historical context reminds us to ignore the noise, which we can.

Avoid breaking news. Pay more attention to broad trends.
 
I found this headline from June 4, 2010: "Stocks Plunge After Weak Jobs Report."

It's true: There was a bad jobs report on June 4th, 2010, and stocks did plunge that day. But three years later, who cares? The initial jobs report was revised to show three times as many jobs created than originally thought, and the S&P 500 has since returned 59%. The must-read headlines from June 4, 2010 is now irrelevant and forgotten. The broader trend -- jobs slowly coming back, stocks still cheap -- was all that mattered for investors.
Breaking news is designed to tug at your emotions and give a sense of urgency, which is exactly when you're prone to making bad decisions. Broader trends are where the money's at.

Avoid strong opinions. Pay more attention to people who talk about their mistakes.
 
Psychologist Philip Tetlock has done some of the best work on the science of forecasts. One of his most startling findings is that analysts that are the most confident in their predictions have some of the worst track records, while those with the best records are constantly questioning their beliefs.
The media loves confidence and hates wavering views, so the analyst who yells the loudest gets the spotlight. Which explains another of Tetlock's findings: Analysts with the highest media profile have some of the worst track records.

Instead of paying attention to strong, loud opinions, give more weight to those who talk about why they could be wrong, what they've learned from past mistakes, and those who forecast in probabilities rather than certainties. They are less entertaining, but more likely to give good advice.

Avoid elaborate interpretations. Pay more attention to the handful of variables that matter most.
 
Most 300-page books can be summarized in 30 pages. The same one-tenth rule of thumb is true for most financial news and analysis. 

Investment bankers write incredibly elaborate 100-page deal presentations that I guarantee you no one reads. They just do it because they're making $1 million a year and they have to show their clients that they put in some effort. Journalists, while paid less, do the same.

You don't need to know the nitty-gritty details about finance or the economy. The big stuff -- how much you need to save to retire, broad valuation metrics, the few industries driving economic growth, the direction of jobs growth -- tell you most of what what matters. Not only is excessive volume a waste of your time, but the more granular an analyst becomes, the more prone he is to over thinking and confirmation bias. "It's better to be mostly right than precisely wrong," as the saying goes.

...Article by Morgan Housel