Discover the Objective of your Financial Journey
By The Boy Who Procrastinates - February 25, 2018
From my interaction with my peers, I have always noticed that many are procrastinating or shunning the topic of investing. It could be due to having insufficient knowledge and understanding around this area, clueless about the appropriate amount to start investing, not having the time to monitor investment performance or loss aversion. Various reasoning often paralyses us from taking charge of our financial future. I have been through this phase and have finally decided to stop procrastinating. In this current Information Age, financial information and resources are prevalent throughout the Internet with just a simple Google search.
Nonetheless, it is best to understand your objective for the financial future before embarking on this journey. Here are some questions to examine:
- What are your financial goals?
- How long is your time horizon?
- What is your risk tolerance and appetite?
Financial Goals
First item on the agenda is to figure out what is it that you would like to achieve in life. These can be further broken down into the following:
- short-term goal (0-3 years): Build an emergency fund, Pay off credit card debts
- mid-term goal (3-10 years): Set aside funds for the downpayment of a house
- long-term goal (10 years & beyond): Prepare for children's education, Pay off the mortgage, Retirement, Achieve financial independence
Risk Appetite
The second component is to determine how much risk you are willing to take to reach your financial goals. This can be deduced by how willing you are to invest in a certain asset class, that will could lose certain percentage of its value, in order to reap returns for your goals.
One thing to take note is that most things in life tend to have a risk-return trade-off. The higher the returns from a particular investment, the higher the risk involved.
Your risk appetite will also depend on the type of goals you are aiming for. For example, the closer you are to your short-term goal, the less risk you generally would want to take with the money you have accumulated to reach the goal. Therefore, it would be prudent to focus on lower-risk investment class that offers high liquidity.
Time Horizon
This refers to the estimated time period to achieve your financial goals. This would also be determined by the profile of the investor. The general rule is that the more time you have to reach a financial goal, the greater investment risk you can afford to bear. Younger adults tend to have a longer time horizon to achieve long-term financial goal.
Comprehensive assessment on these 3 components of investment objective allows one to understand own risk profile, as well as to choose the appropriate financial asset class to invest in. For short-term goals, it would make sense to preserve capital and invest in short-term investments like savings account, fixed deposits, etc. For long-term goals, one may invest in a higher risk asset class like stocks for better returns. Kindly note that your investing approach and choice of investment may evolve as your life priorities and circumstances change over time.
Risk Profile of The Boy who Procrastinates
Currently, I do not have any immediate goals to attain as I believe that I have covered these requirements. The goals that I have in mind are mainly in the mid and long-term range, with the ultimate one being achieving financial independence. Given that I am currently in my late 20s, I believe I still have a mid to long investment horizon ahead which allows me to take on higher risk. In a nutshell, I have broken down these goals into various milestones as follows:
- For short-term milestone, I intend to build a dividend income portfolio to cover my monthly credit card expense of $500 before 32.
- For mid-term milestone, I aim to generate a monthly passive income of at least $2,000 before 40.
- For long-term milestone, I strive to generate a monthly passive income of at least $4,000 before 55.
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