Sunday, August 21, 2011

4 Steps to Set Your Investment Goals

Some people just feel lost in investment especially when they start investing in stock or when they don’t make a lot of money out of their investments. They will start wondering, what the hell am I doing here? This is all because of they don’t set clear investment goals.

When you do not have investment goals, you basically do not have measure of success.. When you do not have the measure of success, you do not know whether you’re at the right track. When you do do know whether you’re at the right there, you do not take actions (e.g. sell your stocks or mutual funds) and lastly you are lost because you simply do not know what to do. So, I hope this makes sense to you that why you must have investment goals for each investment that you make.

Let’s look at the following 4 steps on how you can set your investment goal. Check it out…


Step 1: Identify Your Personal Inflation Rate – X%

Well, before you even start thinking about setting your investment goals, you must first understand one of the most important elements in investing is to protect yourself from inflation killer.  Thus, it is important to identify your personal inflation rate before you start investing. Let’s look at my previous article how you should get your own personal inflation rate rather than the reported inflation rate by your government:

You identify this as X% and don’t be surprise if your personal inflation rate is a lot higher than the reported national inflation rate especially if you’re a big spender. The chances this will happen is high too if you keep earning more and more every years. 


Step 2: Identify Your Safest & Highest ROI – Y%

Your safest ROI could be your saving, fixed deposit (i.e. FD), or your retirement saving fund such as EPF in Malaysia, CPF in Singapore or 401(K) plan in United State.  I don’t know what the rest of the countries call this. :) Usually the retirement saving fund (e.g. the EPF) has the highest ROI as compared to your FD or your savings. You identify this as Y%


Step 3: Identify Your Minimum Investment Goal – Z%

Once you have identified X% and Y%, your minimum investment goal that you set should be based on which one has the highest %. For example, if your Y% > X%,  you minimum investment goal should be Y%. Hopefully your X% is less than Y%. If that doesn’t happen, you may want consider to change your lifestyle. If you don’t want to, that’s fine too. Then your minimum investment goal should be Y%. In short, Z% = MAX(X%, Y%). Hope this is not too engineering for you… :)


Step 4: Set Your Investment Goals

This is the final step is to set your investment goal after you have identified Z%. Basically, there are 2 types of goals that you can set. One is normal and another one stretch investment goals. If you achieve your stretch investment goal, you have basically exceeded expectation. Sound something familiar like your focal? Hahaha…

Well, no hard rules how you want to set the investment goal as long as you make sure it is > Z% but this is what I think normal and stench investment goals should be:

Normal Investment Goal  = 2Z% (2 times of Z%)

Stretch Investments Goal = 3Z% (3 times of Z%)

Note: Z% is your mininimun investment goal.


Let’s take myself as an example. If my Z% = 6% (based on the latest EPF data in 2010) , my normal investment goal will be 12% ROI. If my actual ROI is 12%, I’m meeting my goal. However, what if my ROI is > 18%? I’m basically exceeding my investment goal because I”m achieving my stretch goal.  In order to meet these goals, I"m investing in mutual fund or unit trust, stock, gold, property and etc.

This is how my investment goals look like. So whatever I invest in mutual fund/unit trust, stock, gold, property and etc, my measure of success is based on 2Z% and 3Z%. What about you? If you don’t have any investment goal, probably you can start having one now…


Summary

What do you think of my formula? Sounds reasonable or unreasonable to you? If not, what do you think how one should set their investment goals? As mentioned before, setting investment goal is essential which as important as that you need to have clear financial goal. Without goals, you do not know your direction. In this article, I show you 4 simple steps how you can set your investment goals for both normal and stretch goals. Of course, you can define your own formula. Good luck!

P/S: Hope this is something useful to you guys. I”m going to take vacation off in 4 more days and will not be blogging for about 2 weeks. Yeah! Feel free to comment on this article and hopefully I can get back to you before my vacation. :)

8 Comments:

Michael Tsen said...

good post, should be quite suitable for employees :)

opportunist's goal - make more than market return today

fundamentalist's goal - hand pick the businesses that will last as long as I live.

traders' goal - follow the trend as close as possible

ChampDog said...

Thanks, Mike! Yes, that could be very good for employee as well.

I think my goals more towards opportunistic and fundamentalist. :)

Paul Monax said...

I like how you have included Inflation into your calculation.
That is frequently one of the pieces that are ignored in most calculations of this kind.

kamal said...

Hi,

Its a good one. But, I notice you did include inlation in the formula. But the thing is, as far as I understand, the inflation factor that you included was static while inflation is rather dynamic I think.

So, wouldn't you require the factor to be dynamic? Would averaging inflation work? It might give over estimate though

ChampDog said...

Thanks Paul! Also, not many know the actual inflation rate that happens to them. :)

ChampDog said...

That's the good one, Kamal. :) The estimation here is taking the closest year but I missed out that the inflation rate could fluctuate a lot especially if you buy certain big things during that year. If that is the case, getting the average is a better estimation then. Thanks for your comment! :)

Having said so, you may want to watch out if your inflation rate fluctuate a lot every year because it is harder for you to manage.

kampunginvestor said...

Hi there bro! Long time no see ya! I have been missing of late. Hope you didn't miss me that much eh? ^^

Anyway nice write up. I haven't updated my blog for quite sometime too. Lolx..

Anyway personally i think most people always don't make money from their investments (especially share market) is because they are greedy. They are never satisfied with their returns. They will always ask for more and more.

Just my 2 cents and it feels good to be back! ;)

ChampDog said...

Yo bro, what’s up? Yes, I miss you a lot in fact. lol. Where have you been? Doing some big businesses?

Most people don’t except for those use the “buy and hold” strategy. Anyway investing in stocks might not be suitable for everyone.

If investing in stock is not for you, you can probably put 5% to 10% in your investment portfolio rather than >50%.

Welcome back man!


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