Overview
What exactly do you wish to gain from investing?
How do you define investment success?
These are just a couple of questions many investors, especially young investors, do not give enough thought.
Looking back to when I first started investing, I didn’t really have any clear goals in mind. At the time, I didn’t have a clear image of where exactly I wanted to end up with investing. If you asked me what my goal was, I probably would have told you it was “to make money.”
“Making money” may sound like an investment goal, but in truth it is just some vague, poorly defined desired outcome that has no real weight behind it.
Saying your investment goal is to make money is akin to someone who has started working out saying their goal is to “get fit”. What exactly do they mean by “get fit?” Are they talking about having excellent cardiovascular endurance, increased muscle mass, increased strength, greater flexibility, or one of many other images of “fitness?”
In the realm of investing, what exactly does “make money” look like? Through dividends? Capital gains through the sale of securities or other assets? Rental income? Some sort of mix?
Every investor needs a clear goal, or set of goals, to guide all future investment actions and decisions. An investor who performs all the activities an investor normally does but does not have a clear goal in mind is simply passing the time.
What Exactly Do You Wish to Gain?
Having clear investment goals go hand in hand with adhering to a specific paradigm.
A goal produces a tangible destination for investors to strive for, while a paradigm dictates the actions an investor must carry out to reach their desired outcome.
Back to my example of someone who has just started working out, their goal may be “to gain 10 lbs of muscle in one year.” When asked about how they plan to reach that goal, they may choose to focus on exercises that promote the most muscular hypertrophy, while also adhering to a diet that can sustainably add muscle mass.
Using an investing example, an investor’s goal may be to sell a portion of their shares in 10 years to finance the down payment of a new home.
Because this investor seeks to make money from capital gains, they decide that the most appropriate paradigm to adhere to is growth investing, so all their future investment analysis will focus on assets that stand to gain the most in capital appreciation.
Everyone who invests does so with their own desired outcomes in mind, so there is no such thing as “correct” investment goals. What does matter is having clear goals to begin with.
My Investment Goal & Modus Operandi
The goal I am working towards as an investor is as follows: to create a portfolio comprised primarily of securities to serve as my primary source of income and as the vehicle of wealth I will pass down to future generations of my family.
Although my goal is confined to just one sentence, let me break down all its major implications:
- I stated that my portfolio will be comprised primarily of securities – not entirely. I understand the importance of having some diversification and this leaves me room to add other asset classes such as real estate.
- My portfolio will serve as my primary source of income, so cash flow is of greater importance to me than appreciation. This means all my investments must provide cash in some way, whether through dividends, interest payments, or rent.
- Because I intend on making my portfolio a vehicle of wealth for future generations of my family, my go-to metric for measuring investment return will be total shareholder return.
- This portfolio will be designed to outlive me, so I must ensure the companies I own have a very high probability of being around even when I’m long gone. Therefore, my investment horizon is at least 75 years.
By understanding the implications of my investment goal, I know exactly how I plan to operate as an investor in terms of what investments to look for (a focus on securities), what characteristics they should possess (cash flow and some capital appreciation), and for how long I plan to hold these investments (75+ years).
Lack of Goals = Lack of Direction
Now, imagine an investor who does not have a clear goal (or set of goals) in mind.
Such an investor would be hard-pressed to perform any sort of long-term planning because they don’t know what they are working towards.
In The 7 Habits of Highly Effective People, author Stephen R. Covey says that one of those habits is to begin with the end in mind. Have a clear destination in mind first, then align all your actions and decision making to reach that destination.
An investor who does not have some end goal in mind will just end up wandering aimlessly, and will probably lack the mental strength to keep performing investment analysis for the long-term because there is no driving force behind their actions.
The lack of clear investment goals also means a lack of a clear modus operandi.
How does an investor expect to know which actions they must take if they don’t even know what they’re working towards? Even if an investor subscribes to a certain paradigm such as value or growth investing, they would still struggle to decide which actions to take because paradigms simply provide the theoretical framework, but a framework is useless if there is no clear target to achieve.
Based on what I’ve observed, some of the world’s most successful people, whether they are investors, businesspeople, professional athletes, bodybuilders, or academics, have very clear goals to work towards. No one becomes a billionaire, Fortune 500 CEO, professional bodybuilder, or a world-renowned professor by accident.
Similarly, an investor does not create a formidable portfolio by accident. Strong portfolios are created through deliberate planning, thoughtful actions, and having clear goals in mind.
Define your Future
If you haven’t already, I encourage you to take the time to sit down and really think about what your reasons for investing are.
Know that you do not need to flesh out your goal(s) in their entirety in one sitting. It took me some time to put mine together, and that was because I did a fair bit of introspection and drew some inspiration from other, more experienced investors.
Remember that investment goals are unique for every investor, so there are no “correct” goals to work towards. If it works for you, go for it.
Wrapping Up
Some investors don’t have clear investment goals in mind, and as a result, are at a loss for what to do, now and in the future.
Having clear investment goals allow investors to understand exactly what it is they’re working towards, and how to achieve their desired outcomes in the most efficient and effective ways possible. The lack of any clear goals means an investor will simply be dawdling and have no clear modus operandi to follow.
So, take the time to sit down, really think about what your investment goals are, and work towards those goals relentlessly. Nobody achieves investment success by accident.
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