Morgan Stanley
Wealth Management

Why Having a Goal Is Key to Investing

Jul 8, 2024

With a clear goal in mind, investors can create a realistic plan to achieve their objectives within a certain time frame. Here’s how:

Author
Dan Hunt

Key Takeaways

  • Investing isn’t about choosing the stock that will get you rich quickly. It’s about putting money to productive use in the hopes of earning a healthy return.
  • Building a sound investment program requires establishing your goals and linking your investment strategy to a plan to achieve them.
  • Over time, it’s important to track progress toward your goals and make changes to your strategy and plan, as needed.

One of the biggest mistakes I see investors make is confusing investing with choosing stocks. Ask many people how their money is invested, and they might quickly jump to tell you the latest hot stock they’ve purchased, and the investment thesis that explains why they think it’s going to take off.

 

What is their investing goal? Probably just to make some quick, easy money, which neuroscience has shown makes us feel good.

 

Unfortunately, behavioral economics tells us that acting on such impulses often tends not to end well. To be true to the term, investing must start with a specific goal corresponding to a set time horizon. The goal itself could be anything: buying a new car in two years; purchasing your first home in five years; or retiring in 40 years. What’s most important is to have the goal be the focus of your approach.

 

Once you’ve identified a goal, you can craft an investment program calibrated to help attain it. The best investment program for you will depend on many factors: How much savings can you devote to it? How much time do you have? How realistic is the investing goal given the first two questions and the amount of risk you feel comfortable taking? What is your tax situation? If you choose to work with a Financial Advisor, he or she can help you find answers to these questions and take you a long way to devising a strategy to help achieve that goal.

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Saving for Retirement

Let’s consider someone saving for retirement, typically the focal point around which other financial goals orbit. A plan for that goal could include a desired amount of spending needed to fund your lifestyle in retirement, an intended amount of savings each year that would be needed to achieve that goal, and a suggested asset allocation between stocks, bonds, and other types of investments. There are a lot of moving parts, that may require adjustments along the way. However, many tools now exist, including software tools developed by Morgan Stanley, that can help you connect the dots and track moving targets in changing markets.

 

Since equities are more volatile, but usually return more than bonds over a market cycle (around seven years, on average), long-term investors may need a higher percentage of their portfolio in stocks to reach their goal. For example, 35-year-olds could have 80% of their portfolio in stocks, and possibly more depending on their circumstances and the market environment. That age group could likely withstand the higher volatility in stocks.

 

If the goal is less than five years away, the investor should probably take less market risk to avoid the possibility that the stocks could suffer a substantial decline close to when they would need to convert that equity to cash. An equity allocation of 30%, for example, may be appropriate for someone later in retirement who relies on their portfolio for a substantial portion of living expenses.

 

Once the asset allocation is set, careful security or fund selection techniques may improve performance, reduce risk and lower costs.

 

What if a retirement plan is off track? At that point, investors can use other levers–things like increasing savings, pushing back retirement a year or two or coming up with a plan to work part-time in retirement—to continue making progress toward their goals. While potentially undesirable, these kinds of trade-offs may be the best way to manage the risk of more serious shortfalls in your finances. 

Without a disciplined process and sound advice, you may lack perspective on how chasing a hot stock in the short term can damage your long-term finances.

Goal-Setting and Tracking Matters

What I hope you’ll see in these examples is the importance of setting a goal and tracking your progress against it when investing. Whether it’s a short-term investment goal or a long-term investment goal, a Financial Advisor can help keep you on track. Without a disciplined process and sound advice, you may lack perspective on how chasing a hot stock in the short term can damage your long-term finances. More to the point, you may not realize how positive the impact of compounded returns from sound strategies can be over time. You also may not recognize when you need to make adjustments along the way to stay on track.

 

There is no magic stock choosing formula that will make your most ambitious desires a cake walk. In fact, while security selection is important, research shows that what matters most in investing success is asset allocation–the decisions relating to which sectors of the stock and bond markets to invest your money in, and in what proportions.

 

When you have a goal in mind, your time horizon and risk tolerance will inform these decisions. Setting up your asset allocation in the context of a realistic plan that you can adjust for life and market uncertainties should put you well on your way to achieving your financial objectives. For many people, reaching out to a Financial Advisor is a great way to get started.

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Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

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