Investing fundamentals #1 – Invest with a goal in mind

In the first of a series of blogs about the ten fundamentals of investing, I describe the importance of investing with a goal in mind.

When investing money, always start with a specific goal in mind. You should always link your Financial Planning objectives to your investment decisions, to avoid the common trap of investing without purpose.

Without a specific goal, it is difficult to assess the performance of your investment portfolio in any meaningful way. You can’t possibly know what good, bad or indifferent looks like unless you are comparing performance to a specific planning goal.

An investment portfolio returning only 6% in a year might be considered mediocre if the investment markets are delivering double-digit returns. But what if you only needed an investment return of 3% to satisfy your financial planning goals?

Knowing what you need to achieve with your investment portfolio also helps you to manage risk more effectively.

You might discover that you don’t need to expose your investment portfolio to risky equities in order to achieve your goals. Alternatively, you might find out that you need to take slightly higher levels of risk than you would otherwise feel comfortable taking.

Having a specific financial planning goal to link to your investment portfolios helps you avoid fad investing. You are less likely to follow the herd of other investors into flavour of the month funds or exciting new fund launches if your goals do not require this sort of whizz bang investing.

Instead, investing with a goal in mind can allow you to be a rather boring investor – which can be a good thing!

Don’t invest blindly; start by understanding what you want or need to achieve with your money and then create an investment portfolio which is closely linked to these goals.

Read about all ten investing fundamentals by downloading our free guide:

The Investing Fundamentals Guide 2014