Taking Aim – How to Set Financial Targets
The world of finance and economics has its problems. Unpredictability of markets, evolving technology and social landscapes, constantly changing tax and regulatory environments can all make looking to the future difficult for financial professionals and investors alike. However, arguably the most unnecessary issues faced by our industry are the ones we have created for ourselves.
Since the first financial professionals spoke to the first clients, we have tried to articulate certain details, techniques and peculiarities to the people we want to help, but often the jargon and terminology has clouded the actual reality. Even more frustratingly, the world of investment is full of people who want to sound clever, but end up complicating the situation in the process.
Every now and then, we like to bust some jargon in a way that will help investors examine their own plans and look to the future with less of the confusion. Here are three important financial truths that should help as you build your own financial plans.
Long-term does not always mean the same as a long time.
Risk profile may differ over a long period of time.
Volatility is not the same as risk.
These three are really important to understand when setting your financial goals. Many of us have never taken the time to write down or record financial targets, but it can be a very helpful exercise.
Firstly, you should understand that a financial goal should never start off as a number. Every financial goal should be a want or a need. Think of the things that you will need to spend money on in the future. Think of where you will be (jurisdiction and currency), when that expense might come up (when is the target or the deadline) and how vital it will be at that time (is it essential or a nice-to-have). It doesn’t matter if the target is a roof over your head or a golden helicopter, it can be quantified and projected as a target.
Once you have identified the things that you will need or want to spend your hard-earned cash on in the future, I often suggest that clients break these goals down into short-, medium-, and long-term goals, but here I want to refer back to planning truth #1:
1. Long-term does not always mean the same as a long time.
When I ask clients to consider the term of their investments, I am not talking about a number of years. I am talking about a degree of certainty:
Short-term goals are clearly defined. You can already put a figure and a date on these with a high degree of confidence. You know what your mortgage payments will be and how much you will need for that kitchen renovation next February. A small margin for error is sensible, but if you have already decided where that money will go and when, it’s short-term.
Long-term goals are much less certain. You can say where and when you would like to retire, but if that target is many years away, it's very unlikely that you know exactly how much it will cost you, or the exact date that you will stop working, or even where in the world you might settle down later in life. These types of objectives require setting the goalposts very wide, with plenty of flexibility to adapt and revise the projections over time.
Medium-term goals are naturally in the middle. You can have a good guess at the costs and the timings, but you need a good amount of wiggle room. If you plan to move house in the next few years, you can try to predict how much it will cost and when you will make your move, but these numbers and dates are elastic and susceptible to changes beyond your control.
2. Risk profile may differ over a long period of time.
Once you have separated out where your money will go in the future. Think about the risk profile of the target. That’s right. The goal has a profile, regardless of how you approach investment. Of course, it is important that you feel comfortable with your investments, so if account valuations constantly bouncing up and down will keep you awake at night, you should dial the volatility back in any case, but in general, it usually holds true that shorter term targets need less volatility, whilst longer-term targets can accept more. In fact, having very low volatility in a very long-term target can be very high risk, due to the proportional growth of economic risks like inflation over time.
3. Volatility is not the same as risk.
A short-term goal, where the amount and the timing are fixed and unavoidable, should never be invested in a volatile asset. It might have a chance of growing, but it also has a chance of losing value, which would immediately compromise your plans. A longer-term goal, with more flexibility in terms of when or where, or how much it will be, gives room to adjust, recover or reschedule, so it should often accept more volatility to give the best opportunity for growth or preservation of real spending-power.
If you would like some help identifying your goals and putting together a plan to achieve them, contact us by messaging info@arisaigwealth.eu or through our website chatbot and we will be happy to have an introductory call to see how we can add some value for you.
