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The SMART way to achieve your Financial Goals

The SMART way to achieve your Financial Goals
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In the year 2020, the Nifty started at around ₹12,000, fell to roughly ₹7,500 and then bounced back to around ₹14,000 by the end of the year. No one could have predicted that a pandemic would hit and cause such volatility in the stock market at the beginning of that year. 

As investors, we have little control over the fluctuations in the stock market. Even if we invest in smart portfolios that can give us good returns, the stock market does not care about how our personal portfolio is performing. And so sometimes it might be the case that you need to access your funds well before you achieve your desired returns. As they say – the market can remain irrational much longer than you can stay solvent.

So, what do you have control of? It’s actually quite simple – you can create a plan and work strategically to meet your financial goals. Rather than worrying about the ups and downs of the market, how about creating a strategic plan to save up for a trip to Goa or to study abroad or to buy a car.

But there is a SMART way to create a financial goal. Your goal has to be:

  • Specific – The more narrowly defined your goal, the better you will know the steps to achieve it
  • Measurable – If your goal is measurable and has a money value, you can track your progress against it.  
  • Achievable – It is always better to make sure that you can reasonably attain your goal. If it’s not achievable, it will always be out of reach
  • Realistic – You should have confidence that you can realistically achieve your goal with all the resources available to you.
  • Time-bound – without a time value, a goal becomes open ended, and you could lose the motivation to achieve it

Once you have set a SMART financial goal, what you have in hand is a money value and a time horizon. You can use these factors along with your risk and return assumptions to work backwards and calculate how much money you need to invest to meet your financial goal.

How should you select the appropriate portfolio for your goal?

You first start with your risk appetite. There are many ways to build wealth, but few as time-tested and reliable as passive investing with asset allocation. If you are a cautious investor, you should have a greater allocation to fixed income. If you are looking for growth, you can probably skew your portfolio towards growth assets like equities. If you are somewhere in the middle you could probably go for a more balanced approach.

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The asset allocation approach is best for most investors. But, there are some long term investors who want to be much more aggressive. For them, the long term returns of equities are hard to beat – as long as they are comfortable with the risk. There are many strategies that can work for an equity investor, but we prefer the approach of buying good quality companies that are investing their capital smartly and holding them for long periods of time

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Now that you know your risk preference, you adjust your asset allocation down based on the time horizon of your goal. The reason being that the shorter the time horizon for your goal, the less risk you should take because you don’t want sudden volatility in the market to mess up your plan. In fact, for less than three years it is probably best to stick to purely fixed income options.

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So, for example, even if you are an aggressive investor, if your time horizon is say 4 years, you probably should look at having a more conservative asset allocation strategy.

In this way, we hope you will be able to create SMART financial goals and invest strategically in a way that is better suited to achieve them.

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The SMART way to achieve your Financial Goals
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