How To Set Investment Goals If You’re A Newbie

New to investing? From defining your investment objective to figuring out your risk appetite, here’s the ultimate guide to making investment goals so you don’t set yourself up for failure.

You’ve probably heard stories about individuals becoming millionaires overnight because of their stash of Tesla stocks or meme stocks that went to the moon. In these situations, it can be extremely tempting to just drop everything you’re doing and buy a specific stock that’s speculated to do well.

However, while these incidents do occur, you’ll have a higher chance of growing your wealth by investing responsibly and consciously. 

If you’re new to investing, then you should all the more have clear investment goals before you park all your money in an asset. Not sure how to go about it? Here’s how to set your investment goals so you have a clear idea of where you’re headed and how you want to grow your money.

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1. Define your investment objective

Whether you’re investing for your retirement or to get a house, knowing your investment objective is important. Even if you’re just starting out, attaching your pool of funds to a financial goal is useful to set the foundation of your investing strategy. By knowing exactly why you’re investing, you will find it easier to figure out your time horizon and the approximate gains you can make at the end of it.

Most people, when starting out their investing journey, won’t have a specific objective in mind apart from “earning money”. If you have the same mindset, you might find the plethora of information online overwhelming. With so many investment vehicles with varying risks and capital gains, you won’t know where to start. Are robo-advisors better than stocks? Or is a fixed endowment plan better for your needs?

By defining your investment objective, you will naturally filter out some investment vehicles or strategies that cannot meet your needs, thus helping you to streamline your options.

Your goals should follow the SMART guidelines:

• Specific: be as clear and specific as you can instead of giving rough estimates
• Measurable: set quantifiable goals to keep track of your progress
• Achievable: set attainable goals within your reach
• Realistic: take a realistic look at your financial situation before setting your goals
• Time-based: figure out a timeline for your goals

2. Figure out a strategy

After defining your goals, you’ll have to figure out an investment strategy that will help you achieve them. There are four main investment strategies — growth, preservation, cash flow optimisation, and lifestyle maintenance vs improvement.

Growth

Growth is relatively simple. Investors who follow a growth strategy would want to, well, grow their money and make their money work harder for them beyond just weathering inflation. While many would think that this is a relatively common strategy for all investors, only those who have a lengthy time horizon can successfully pursue this objective.

Preservation

Preserving your money can be a part of growth too. If you have a shorter time horizon, you would want to ensure that a part of your money is preserved and untouched. If you’re about to retire in, say, ten years, you wouldn’t want to park all your funds into high-risk investments, and instead pursue a peace of mind knowing that about 90% of your funds are safely locked in.

Cash flow

Optimising your cash flow not only lets you have a higher disposable income to invest with, but also generates passive income for your day-to-day needs. You can invest in high-dividend stocks or bonds to improve your cash flow for greater flexibility, adaptability and peace of mind.

Lifestyle maintenance vs improvement

Even if you have no goal in mind, you could also invest for the present. This could include buying material goods after day-trading or using the funds earned to cover your immediate expenses to save up for future goals.

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3. Decide on your risk appetite 

Once you’ve decided on your investment goals, get honest about your risk appetite. Whether you’re extremely risk-averse, risk-taking or fall in the middle of the spectrum, your risk appetite will determine the kind of investment vehicles you can use to match your needs.

Say you’re saving up for the downpayment of your next home in three years' time. You won’t be able to take huge risks investments-wise since you do not have much time to weather any dips in your capital and investment yield. Instead, you would need a safe investment tool that can give you consistent and healthy returns to ensure that your funds continue to increase steadily.

Some examples of stable investments can include bonds, endowment plans or fixed deposits. However, the downside of these investments is that the yields you can reap aren’t going to be very high.

On the other hand, if you’re saving up for your retirement and have a time horizon of, say, 30 years, you may be able to afford to invest in something riskier that can offer higher returns. Since you have a longer time to invest, investing long-term will help you to ride out the market fluctuations and enjoy potential capital appreciation over time.

Looking for a fuss-free investment tool? Sit back, relax and let your money work for you with the best robo-advisors in Singapore.

4. Calculate the gains you’ll want to make

While the gains you make are not guaranteed and cannot be planned, you can roughly gauge the gains that you need to fulfil your investment objectives. Your risk appetite also goes hand in hand with the gains you’re aiming for. The higher the risk appetite, the higher the potential returns.

If you’re a novice, you shouldn’t jump straight to an investment tool that has a projected return of 20%. While it may seem extremely tempting, it’s good to note that past performance is not indicative of future performance. On top of that, the risks involved should be relatively large too.

Do you want a tool that gives you steady returns? Or are you in it for the long run such that your funds can afford to dip at the start while projecting high returns?

Take the extra step to plan out your returns on a spreadsheet to see just how long it would take for you to reach your investment goals based on the projected returns. Will you be able to achieve the sum that you’re hoping for within your fixed time frame? If not, go for an investment that has higher returns or complement it with another safer investment tool to reach your goal.

Want to start investing? Compare the best brokerage accounts in Singapore.

5. Set up regular reviews

Once you’ve completed the first four steps, you’ll need to set aside time to review your portfolio.

It’s good to measure your success at regular intervals in your investment journey, be it every six months or every year, depending on how long your time horizon is and what kind of investment you’re investing in. Keeping tabs on your progress helps you see if you’re on track towards your goals and whether or not any changes or alterations are needed. Maybe it’s putting in more funds each month (assuming dollar-cost averaging is your strategy) or switching to other stocks.

However, a word of caution: your progress doesn’t always follow a linear path. Your investments will inevitably fluctuate because of market conditions, so a small dip in your portfolio shouldn’t have you scrambling to cash out and pick another stock. You should do your due research and pick investments that you’re comfortable with and stocks you have confidence in. 

While emotional investing is hard to avoid, you should be a conscious investor and prevent your emotions from ruling your investment strategy. Once you’ve come up with a plan, stick to it (unless of course, the company goes bankrupt).

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Final thoughts

Ultimately, you should make investment goals that match your financial needs. While everyone wants to earn S$10,000 in profits in five years with just S$1,000 in capital, that just isn’t going to happen.

It can be extremely daunting for a novice entering the investing world. Make sure you read up and speak to investment experts for tips and advice. Everyone’s investing journey is different so you should never compare yourself to others. Don’t ever be pressured into buying something that you’re not entirely sure about or comfortable with. As long as you invest responsibly, your hard work will pay off!