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What’s your money goal?

by Money Puzzle   ·  February 11, 2024   ·  

What’s your money goal?

by Money Puzzle   ·  February 11, 2024   ·  

Photo by emre keshavarz

Investing your money is a multiple-choice game today. You can pick across assets – right from bank deposits to commodities, art and wine. There is always one flavour of the season; in the pandemic, it was cryptocurrencies, then NFTs and most recently startups. Honestly, it’s an exhausting task to follow the trend. And what if you get the least profitable curve of this trend, you know, buy close to the peak and then lose your patience or attention, sell out close to the bottom only to chase the next fast-paced trend.

To be honest, trends in investing are not new. However, the season of free money hasn’t quite come to an end and as people discover the power of passive income through investing, there is a certain bravado with which investment choices are now being approached. There is also the search for the multiplication of returns as fast as possible.

Risk in investing is a positive need, in fact, it is a critical requirement. Without risk, you cannot hope to generate a return. However, it is calculated risk rather than carefree spontaneity while following a trend, that leads a well-calibrated investment portfolio to successful outcomes.

Following a trend may result in a blowout profit and the multiplier you are hoping for, provided you have the foresight to enter and exit at the precise time and also do it repeatedly with the topmost accuracy for each asset trend. Basically, it requires luck. On the other hand, calculated risk is a strategy that you build after taking into consideration asset risk, market risk, your own ability to absorb risk and your return objective. In fact, the last part is the most important in deciding your investment choices – what are you looking to achieve? What is the investment objective?

Bravado in investing is exciting but calculated risk and thought-through allocation in boring assets is what has a higher probability of sustained wealth creation.

Investment objective

Did you know that fund managers have to define the investment objective of the portfolio they are building before they actually pick any securities? This is true whether they are managing an equity, debt, hedge fund or alternative investment fund. The reason to do so is primarily to ensure that they have a defined outcome. Unless you know what you want to achieve, it is hard to focus on the outcome and the strategy to achieve it.

For a fund manager, this investment objective is like a level one filter, which keeps out all other assets and securities which do not fall within the desired objective.

As an investor, you must also define this objective, which drives your need to invest. Is the objective simply to create wealth, if yes, then over what period? Is it to fund your car purchase a year down the line? Is it to take a Europe tour two years later? It is for the down payment on your house? Is it for retirement and so on?

Answer this: What will I do with the money I make from this investment? What do I need it for? What do I want it for?

The answer to this question will depend on your various needs and wants and there can be multiple times that you answer this question because your needs and wants don’t stop at one.

Based on the answer, you must decide the best investment – trend or otherwise. Let’s say the answer is to double wealth in one year. Now that’s a clear objective. What you should also know about investments is that return is almost always a result of risk taken. Doubling of your money in 12 months is a super return, but as you may have guessed, it requires super risk. What this super risk means is that you have to take a chance and be willing to lose money; it may be that the losses get recovered over time or it’s a permanent loss. Whatever the case may be, there is a high probability that your return objective is unfulfilled in the time period you have defined – that’s the risk. Now ask yourself this next question.

Answer this: Is the outcome of the investment negotiable? Is it ok if it takes longer than expected or if I lose money?

If the answer to both parts of this question is yes, it means two things. Firstly, it means you have more money to spare for investments, than you are putting at stake in a high-risk proposition. Secondly, it could mean that you have the ability to wait it out in case losses can be recovered over time. Thus, you can follow the investment trend, pick up high-risk options like crypto and start investing and go with it.

If the answer to the first part of the question indicates that the outcome is non-negotiable, it means you need the money from this investment for something sacrosanct like a down payment for a house or your rent and ideally you shouldn’t take chances on an investment which could lose capital. Rather stick to investments where the return outcome may be lower than the trend assets but it’s stable and you can say with greater certainty that you will make that return in the identified time period.

Only when you define the reason you are investing, will you be able to identify where you should invest and for how long.

The good thing is that there is no restriction on where you can invest money, and all your funds needn’t go to one asset – spread it out. Diversify your investments, based on your needs and wants.

The frills

While risk and return features are step one to identifying your ideal investment asset, to figure out which product within that asset class fulfils your requirement, you have to consider the frills. What are these frills? These are features such as flexibility, liquidity, transparency, tax efficiency and ease of transaction. When these frills are fulfilled positively and you combine them with the most accurate investment objective, the outcome most likely will be satisfactory.

Sometimes, you have to forgo a frill for another or for the sake of a higher return. However, at all times keep in mind that making an investment will always be an easier task to complete, it’s the exit or withdrawal or redemption or sale which often runs into hurdles. Keep a look out for these hurdles at the time of sale and whether or not you manage to attach the other frills; a smooth exit from the investment of your choice at the time you desire and at the most efficient market price is also important.

Whether you use the proceeds from assets yourself or keep them for the next generation, ease of access to profits should not be ignored. Think about selling large land parcels to generate retirement income or trying to remember your crypto wallet key 15 years after making the investment versus a one-click, digitally enabled sale of a financial security, where money hits your bank account the next day.

Make the choice you will, but keep ease of exit in mind. 

No asset is good or bad or necessary, it’s all about what you are seeking when it comes to returns, and what the purpose of your investment is. When you define this, you will not only be able to channel your savings appropriately but also keep aside that little bit of surplus to experiment with trends that come and go. It’s almost like having the best of both worlds.

All you have to do is clearly define your money goal.

Also read:

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    In a growing economy like India, there are bound to be innumerable stories about how individuals have gained multiple times the value of their investment in real estate.

  • What’s your money goal?

    Investing your money is a multiple-choice game today. You can pick across assets – right from bank deposits to commodities, art and wine. There is always one flavour of the season; in the pandemic, it was cryptocurrencies, then NFTs and most recently startups. Honestly, it’s an exhausting task to follow the trend. And what if…

  • Passive equity funds can make for a good first investment

    Starting your first investment no longer requires much thought or action. It’s literally a job done in 30 mins. Nevertheless, where you invest today makes a big impact on your future investment choices too.

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