What Do You Want to Accomplish From Your Investments?

What Do You Want to Accomplish From Your Investments?

October 23, 2024

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“If you want to live a happy life, tie it to a goal, not to people or things.”

  • Too many people are investing speculatively just to make quick money. You need to learn some fundamentals to better understand the objectives of investing.
  • The first consideration of investing is to secure returns. You should know the end goals of your investments, plus whether they are suited to the time frame of your goals or not.
  • The second consideration of investing is to manage risk. You should know what level of risk you can stomach and how much of it you should take on. How much risk you take on may depend on whether you are aiming to grow your existing assets or protect them from inflation, with both in the context of your investment timeframe.

What Do You Want to Accomplish From Your Investments?

Usually, investments aim to grow your existing assets, but that growth should be aiming towards something. Example end goals for investments include: 

  • Funding a child’s university expenses
  • Funding a wedding
  • Funding your retirement
  • Starting a small business
  • Saving up for a home
  • Supplementing (or replacing) your pay

Deciding what it is that you are aiming for will allow you to calculate the time frame of your investment. 

Have a Goal when choosing what to invest in 

Example:

  • Kai Bin has $10,000 to invest.
  • He wishes to put the money away for no more than 10 years and hopes it becomes at least $20,000 to renovate his home.
  • He considers investing it into an S&P 500 index fund, which has recorded compound annual growth of 10.24% including dividends over the 30 years to the end of December 2020.
  • If his investment continues, earning the 30-year average returns*, it would take Kai Bin just over 7 years to turn his investment of $10,000 into $20,000.
  • So, assuming that Kai Bin is happy with the level of risk involved, he can now invest his money and accomplish the purpose of his investment.

* note - past performance is not indicative of future performance 

Time Horizon 

This is the period over which you invest. Investments should suit the time frame of your goals. When is it that you’ll want to access the money? For example, don’t try funding this year's Christmas vacation with an investment in $DOGE.

Photo by executium on Unsplash

Ultimately, investing is a long-term game, so don’t let short-term volatility sway your mood on investing. Remember the saying - it's all about time in the market, not timing the market. It can be nearly impossible to know the best time to invest, other than in hindsight!

For example, let’s say you had invested in an S&P 500 index fund on 1st Jan 2018: 

(S&P 500 = a stock market index made up of 500 of America’s largest companies with publicly available shares 🇺🇸)

S&P 500 10 year average returns (2010-2020) = 13.9%*

*Compounded Annual Growth Rate

Hindsight is a wonderful thing! Although it would have been frustrating to have begun investing in the S&P 500 during 2018, the big picture is what you get over the long term.

When looking at investing over a period, dollar-cost averaging is a sensible strategy. 

Dollar-Cost Averaging 

In Dollar-cost averaging, you split your purchase into separate periodic transactions. You will commit a fixed amount of money to invest in a particular asset on a regular schedule. This aims to benefit from price volatility when you buy and takes away the human element of trying to time the market (on top of the already difficult decision on what to buy)!

If you have short-term horizons, it’s quite likely that you’ll be relying on extreme levels of volatility (hopefully in your favour) to provide returns, as other forms of investment income, such as interest or dividend payments, will struggle to produce any sort of substantial quick returns. What’s more, the stage of the economic cycle, or a company’s performance, is unlikely to drastically change in the short term. If you’re betting on volatility in your favour, remember that volatility goes both ways - just ask anybody who thought Bitcoin was quick easy money in December 2022, priced at $60,000… (Bitcoin went on to hit lows of $20,000 six months later). 

An white opened notebook planner

Photo by Eric Rothermel on Unsplash

Passive Income 

It’s important to recognise the role that investments play in providing passive income, not just while people are of working age, but also as a form of income during retirement. Many of those investors don’t care about the market prices of their investments at all, as long as they provide them with the income they want. Maybe they have a point! 

Once you have read through the previous parts of this topic and (hopefully) been able to identify your risk preference, you can use the investment risk pyramid to identify a diverse range of assets for your portfolio.

INVESTING CONSIDERATIONS - RETURN. COMPLETED. ✅

Sources:

  1. https://www.sgx.com/research-education/market-updates/20181130-performance-highlights-spdrr-sti-etf-and-nikko-am-sti 
  2. https://www.fool.com/investing/how-to-invest/index-funds/average-return/ 
  3. https://www.sgx.com/research-education/market-updates/20200102-sti-clocks-94-total-return-2019 
  4. https://public.com/learn/how-to-set-investment-objectives 
  5. https://www.oreilly.com/library/view/ft-guide-to/9781292129327/html/chapter-005.html 
  6. https://www.ocbc.com/simplyspoton/financial-wellness-index.html 
  7. https://www.investopedia.com/terms/b/buy-the-dips.asp#:~:text=%22Buy%20the%20dips%22%20is%20a,price%20in%20the%20short%2Dterm.&text=Therefore%2C%20they%20are%20buying%20when,some%20potential%20future%20price%20rise
  8. https://www.fool.com/investing/how-to-invest/stocks/average-stock-market-return/ 
  9. Header photo by Pexels

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