The Ignorant Investor — Defining Goals, Part II
“Anyone who is not investing now is missing a tremendous opportunity” Carlos Slim
If you are reading this post, before reading Part 1, then I recommend you go through Part 1 first and then come back here. That way what I cover here will make more sense.
I am hoping that after reading Part 1, you are feeling a bit more open to the idea of regular saving and investing your money into something — what that something is or should be will take a while to become clear, but I am glad that you have decided to continue reading these posts, which means I am on the right track, and so are you.
Take a brief pause here, and let’s try to do a ‘mirror mirror on the wall’ type of mental exercise here, except in this case the mirror is your mind, and you are asking it to show you a picture of where you would like to be financially down the road. What sort of financial position would you like be in, after 10 years, after 20 years and beyond? Why do you feel this is the right fit for you and your family? And what would you need to do differently compared to what you are doing now or have done thus far that will help you make this vision a reality? Each of these 3 questions are equally Important. Just having a vision and plan of where you want to go is not enough if you are not able to explain to yourself the Why Part, i.e. why is this vision and plan the right one for you compared to something else. Is this something that will truly make you happy? Or did you come up with this plan because you saw something on TV or read it in a book, or perhaps you know of someone who’s life you admire from afar and think that ‘It would be amazing, if I had this life’.
This step is easier said than done, but it is a very important part of the process that you need to clarify and define for yourself. No one else can or will do it for you.
I won’t be surprised if you are now thinking that if I have to do everything myself, then why am I even reading these posts! I said in the beginning itself, that I can’t and won’t tell you what to do, because there’s no way for me to know if you do what I tell you to do, then will it bring you any success or not. I want to set you up to succeed on your own and that’s why you need to bear this burden for now.
Setting long term financial goals is like going on a really long journey — if you know where you are right now and where you are headed then you can put the destination in your GPS device and you will have a detailed turn-by-turn route plan. But, if you don’t know the destination, then you will end up driving randomly and you might see some beautiful places along the way and have some wonderful experiences, but there might also be some not so pleasant places and not so wonderful experiences — and our goal here is to avoid these unpleasant surprises and get you to your destination safe and sound and in one piece!
I am not talking about some grand vision here, so let’s try and stay close to planet earth for this task, rather than shoot for the moon. Your investment goals, plan and horizon should be in accordance with where you are in your career and stage of life. It will be absolutely amazing if we can all come up with a realistic and concrete long-term goal, plan of action and actually stick with it, but in my experience the further we go, the more vague and grander the plan will sound. I would advise you to break this down into smaller chunks and see if we can come up with a roadmap to conquer these small hills first, before we head towards Mt. Everest.
Just imagine where you would like to see yourself financially in 5 years, 10 years, 20 years and so on. Anything less than 5 years (even this is a short time frame) in the world of saving and investing would be wishful thinking, and the outcome will depend a lot more on your luck, rather than skills or your judgement, or simply just being there in the market. Realistically speaking, even 5 years is too short, but for this exercise lets take baby steps first.
Investment analyst Kenneth Fisher once said “Time in the market beats timing the market” I will talk more about this concept of being in the market for the long term in later posts, but the key takeaway here should be that your financial plan should include the basic assumption that whatever investments you make, you will make those with the understanding that you will be leaving those investments largely untouched for a long period, irrespective of what happens in the market.
This definitely does not mean that if there are clear signs that the boat is going to sink for sure then you should let your investments go down with it, but the point is that you should not be in the market just for short-term gains or leave the market at the first sign of losses. You should aim to be present in the market for the long term, the longer the better, in terms of returns, in most cases.
If it’s not become clear by now, then hopefully it will become clearer soon. There’s a reason why I keep mentioning the word investing and not trading. Investing in my mind is something that you do for the long run, whereas I look at trading on the other hand as something more short term, where main aim is to make quick money from an asset class and then move on to the next trade. People go to the gym regularly or go for long walks or runs, because they are interested in Investing in their physical health. People read books, they solve sudoku puzzles, they participate in seminars as a way of Investing in their mental health. Life partners make compromises for each other, they are ready and willing to make sacrifices for each other, because they are interested in Investing in their relationships. We are not trading one thing for another here, but rather investing for the betterment of ourselves, our families and our future.
Anyway, let’s get back to the topic of this post — setting financial goals. For the sake of the ‘mirror mirror on the wall exercise’, let’s look at the example of two very different people and see what their financial goals could look like. For the first one I am going to assume we have someone in their early 20s who is fresh out of graduate college and is just getting started with their career. This person has the most valuable asset on their side and that is time — time to invest, time to experiment and time to withstand market volatility. Their short-term financial goals might be to get in a position where they can pay off high-interest loans/debts like credit card bills or a loan they took out for their first car or perhaps student loan — this is more valid for countries like US where even the student loans can have relatively high interest rates. Or their goal could be to start building an emergency/savings fund. Paying off high-interest loans/debt will then free up the money to be invested towards meeting their mid-term goals of having a larger emergency fund or have some savings to go for an advanced degree program, or boot strap their own venture or perhaps pay off the down payment for the first apartment for self-living or even for investment purpose. The long-term goals can be a bit vaguer and ambitions at this point like grow retirement savings to a certain amount by age 50 or get a villa in French Riviera and own a sailboat!
Now let’s consider another person in their late 30s or even 40s, who has had a steady job for a while, got some savings in the bank, is married and has a nice small family with kids. This person has a lot going for them and has done a lot of right things thus far, except build some sort of steady investment routine and thereby portfolio. This person can still reap the benefits from the investment market, but on the flipside, they have relatively less time to be present in the market compared to our young graduate, hence they need to take market volatility into consideration and make investments keeping that in mind. For this person the short-to-mid-term goals could be paying off any high-interest debt, for example the loan they took out to buy a fancy car, or paying off mortgage for their apartment or upgrading to a bigger house or increasing savings for children’s college fund or maybe even increase their contribution towards the retirement account. Their longer-term goals could be to become completely debt-free, ensure their health care and retirement requirements will be taken care of, and still have enough savings to live a life they want without expecting anything from the family or having any dependency on the social system.
The young graduate or the budding entrepreneur might not have a lot of responsibilities on their shoulders yet, their income might be limited since they have just started their working career, but they have time on their side, so they might consider going for an investment portfolio that is more skewed towards individual stocks or mutual/index funds and some sort of recurring savings account (to be covered in the following posts). Stocks and funds-based investments can be considered more volatile, but these options have higher upside potential. These investment options require low upfront capital and hence will be more suitable since you have limited disposable income, but a longer investment horizon to ride out the market volatility. At the same time, the recurring deposit account is a ‘safer’ option with a fixed maturity period and fixed interest, plus it will help them get into the habit of building up monthly savings. These savings can then be later used (if needed) towards the down payment for the house. The young graduate might even consider having two recurring savings account — one for the house/studies or whatever they plan and one that they will never touch and let the compounding do its magic, and this will be their emergency fund.
Now as for the young family, they will have a bit more responsibilities on their shoulder, but they might also have a higher combined income than the young graduate. Their investment plan and view of which investments make better sense might be different from the personas described earlier. Let’s assume that their take home monthly income is higher than the young graduate, but most likely they will have higher expenses as well — higher rent or monthly payment or maintenance fees for their house. Fees for their kid’s school or kindergarten or hobbies. Various kinds of insurances, etc. Also, the young couple doing full-time jobs, managing family might be more pressed for time to do proper analysis of individual stocks hence for them a portfolio skewed more towards mutual/index funds than individual shares in a set of companies, plus a fixed and/or recurring deposit account with compound interest for near-guaranteed return after some years might make more sense. Also, they might want to consider looking into the option of having some investment apartments’ (provided they can get a loan at reasonable rate and rent to cover off the monthly expenses) to build another source of regular income to pay off the high-interest debt or for further investing into funds or for adding to their retirement account.
It’s not my intention to say that if you fit either of the two personas described above, then this is what you should be doing. These are just examples to show how different stages in life and income and responsibilities and time horizon can lead to making different financial goals and thereby different investment choices. There is no right or wrong answer here, no textbook plan that will work the same for everyone. Also, not every plan has to include a massive seaside villa, fancy chauffeur driven cars and first-class flights. Your plan could be as simple as retiring by 50 and opening a café, if that is what makes you happy and gives satisfaction.
There’s this concept of defining ‘enough’ — how much or what is going to be enough for you to have a decent and happy life. Reality is that for most of us, this tends to be a moving target, and that is often a big reason for our financial anxiety and unwanted stress. The moment we reach the initially defined ‘enough’ level, we set a new target. Once we reach the new level, we set up a higher level and so on and so forth. Meaning, we are constantly chasing the moving target and don’t give ourselves the chance to feel good about what we have achieved or to ease up a bit on the daily grind and start doing things that we have always wanted to do.
Unfortunately, the situation is even worse with the so-called social media generation and the proliferation of social media in their daily lives. This makes the target setting and defining ‘enough’ a lot more difficult than it ought to be. They live in the world of digital likes and number of followers. They spend more time thinking about ways of impressing (read jealous) others or worrying about what others think about them. They are always in a catch-the-wave mode and don’t want to be left behind. Even Oxford Dictionary has a word for this phenomenon — FOMO, Fear of Missing Out.
For the social media generation, today is more important than tomorrow. Showing off is considered the new normal. Putting their latest and greatest hits for the whole world to see online is part of the DNA. Acquiring material possessions gets higher priority than making regular investments or building wealth.
It’s not that the social media generation does not want to make money, or build some sort of wealth, they do, but the challenge with them is their innate compulsion to compare themselves with others. No one from this generation will agree to what I am saying here, but at the back of their minds, there’s always some calculation going on, on how to do one better than their so called competitors.
Think about the last time you felt happy or got impressed when you saw your friends’ new car or their photos from a dream vacation or their fancy new home theatre system with flat panel 100” TV and surround sound system and what not. I might be generalizing here, but I assume that there wouldn’t have been many instances in your life so far where you have felt happy when someone else bought or achieved something special. Nothing wrong with you, this is just basic human nature. Envy, jealousy or even self-pity comes more naturally to us mere mortals, than admiration. Morgan Housel puts it very succinctly in his best-selling book The Psychology of Money — ‘No one is impressed with your possessions as much as you are’
There was a very aptly made meme circulating the social media a while back, which basically touched upon this very topic — if we don’t compare ourselves to others, then our family or friends will do it for us. The meme went something like this — Sundar Pichai (originally from India), CEO of Google was on the phone with his mother and she was giving him a hard time on how he’s still working for a company while Rishi Sunak (also originally from India) who is younger than Sundar Pichai has become the PM of UK, a country that once ruled most of the world, including India!
Imagine being the CEO of one of the biggest companies in the world, and still you are getting compared to someone else! Where do we draw the line and say, that’s enough.
The moment we get into the race of comparing ourselves with others, or defining our goals by looking into someone else’s mirror, we have lost the race already. In this mode you will always be catching up. You can always find something better, bigger and fancier that money can buy — it’s a never-ending cycle. The sooner you realize that you are defining the goals based on what will make you happy and satisfied, the better your chances will be of achieving those goals.
This is the reason why I said in the beginning, defining our financial goals and setting our ‘enough’ target is not an easy task. You need to figure out what YOU really desire, what will make YOU happy, what will let YOU have a good night sleep, rather than worry about what someone else will think or how someone else will judge you. Who cares? The longer you spend building and buying possessions to impress others, or to fulfil your wants, rather than your needs, the longer it will take you to reach the financial nirvana. Of course, if this is the path that you want to choose for yourself and this makes you happy and you can sleep peacefully at night, then please continue with this and don’t bother reading the next few posts. Next posts are intended for simpler beings!
I have a friend in his early 50’s now and I have known him for nearly 25 years. We went to the same graduate college and as luck would have it, we even ended up working at the same tech company initially for a few years. He always had a very clear thought process and said that he will retire by 45–50 when he’s still physically and mentally strong and then would like to spend time with the family and travel the world.
He’s one of the most down-to-earth fellows I have known, and he told me early on that he has been making some investments in real estate and in stock market since his late teens, but I didn’t know the details and I never asked for the same. Come his 50th birthday and he threw a party for his friends and family followed by the big announcement — I am retiring! Now retirement does not mean that you stop working all together but rather tone down the pace a bit and start living at your own terms.
I now know a bit more about how he managed to retire at 50, but the point being, he had a goal in his mind, made a clear plan, and worked on that plan on a consistent basis so that he could retire on his own terms. I can say for a fact that he’s financially as independent as one can expect to be. He is not living in some fancy 10-bedroom mansion or driving a Maybach, but he does what he wants to do now and when he wants to do it. And from what I know and can see he’s extremely content with what he has, he has reached his ‘enough’ level.
One thing that helped him was that he started his investment journey in his teens and continued that for all his working career! Now he’s reaping the benefits of starting early and staying true to his goals and plan.
And that should be your takeaway from this post — take a step back from the hustle and bustle of everyday life and define your ‘enough’ goals and elaborate that with the how and why. Once you have even a draft version of your goals defined then start following your plan by kicking off or enhancing your savings and investment journey as soon as you can. Make it a part of your inherent DNA. Try and stick to your plan for as long as possible and stay consistent. Every small bit helps, and consistency is the name of the game.
