Let’s talk goal-based investing!
As an investor, you probably have a lot of questions running through your mind such as how to invest, where to invest, which asset should receive the most allocation, among others.
If this is you, it is crucial to have a financial plan ready before you start your investing journey.
The easiest way to support this journey is through goal-based investing.
In a nutshell, goal-based investing refers to a specific type of investment strategy that leverages investing to work towards meeting personal financial goals.
We can, therefore, say that in goal-based investing your financial goals decide your asset allocation. With this type of investing, you don’t consider an investment portfolio as a separate account from your personal life.
Instead, each investment has a single purpose.
Asset allocation in goal-based investing is personal since you map your investments to your goals. It is not based on some pre-decided benchmark. Therefore, it takes into account your time horizon, understanding of risks, as well as expected returns.
Having an expert will help you come up with a sound path for your goals and will accelerate investments while mitigating risks depending on how close or far you are from achieving them.
This is especially important for first-time investors, who should also have a financial plan and an approach to make it a regular habit.
How Does Goal-Based Investing Work?
In this type of investing, you actively play a role in decision-making and because you are looking at meeting different goals, you can consider the risk level for each goal as well as your timeline when choosing the kinds of investments you want to include in your portfolio.
As opposed to monitoring the success of your investment by looking at whether it is outperforming benchmarks, you measure it by reviewing how well that investment is tracking against the goal it is set to achieve.
From a tax perspective, goal-based investing is viable. You can design a plan that provides a framework for utilizing tax-efficient strategies when choosing where you’re putting your money into.
Incorporating it into your portfolio
If you are looking at exploring this type of investing, you can start implementing it right away, but it is important to know a few things first before getting started.
Here are some simple steps:
- What Are Your Goals? – This is where you make a list of specific financial goals such as your children’s education, college fund, retirement, or a home that you want to save money for.
- What’s Your Timeline? – How long do you want each goal to take? This is especially critical for the number of years you are going to save and how long the compound interest can work on your behalf.
- How Much Money Do You Need? – You also need to calculate how much each of these goals will cost in today’s currency.
- What About Inflation? – Inflation tends to fluctuate over the years. While considering goal-based investing, it is important to factor in inflation. This way, you can estimate the future cost of your goals. You can do this by increasing the cost of your goals in today’s Kenyan shillings by inflation over your timeline to understand the targeted amount for each goal.
- Determine a realistic rate of return – Depending on your risk tolerance and preferred asset mix, determine what rates of return you can realistically expect from your portfolio.
- Calculate how much you need to save – Now that you have an idea of how many years you need to achieve your goals, the expected future cost, and the rate of return, you can determine how much you need to save on a monthly basis to reach those goals.
On the Ndovu platform, we have a simple calculator that gives you a clear picture of these details.
Having a plan well in advance helps you remain on course despite market fluctuations. As long as you stay committed and adhere to a logical asset allocation approach, you can reap big from your portfolios.
Luckily, Ndovu can easily help you build a personalized portfolio by building a plan that is perfect for you. We put you first and help you clarify and reach your financial goals.
All you have to do is determine what your goals are and the timelines for when you hope to achieve them, then establish how much you earn and how much you need to save.
Get started on your path to achieving your goals today.
If you have questions about your portfolio or how this approach can support your investing program, don’t hesitate to contact us today.
Principal, Ndovu Academy
In partnership with Soko Directory.
Ndovu is an online platform owned and run by Waanzilishi Capital Limited, a licensee of the Capital Markets Authority (Kenya).