If you've ever had a performance review at work, you've probably already experienced the power of goal setting. In the workplace, meeting your goals leads to positive results, like feelings of accomplishment, promotions and raises. (Not meeting those goals, on the other hand, generally doesn't work out quite as well.)
Though you might perceive goal setting simply as a helpful exercise and/or workplace management tool, it should also be part of your financial planning process. Why? Research on goal-setting theory
helps explain how setting specific, relevant and realistic goals can benefit your portfolio.
Is Goal Setting One of Your Financial Planning Tools?
Originally proposed by Dr. Edwin Locke, Dean's Professor Emeritus at the University of Maryland's R.H. Smith School of Business, goal-setting theory posits that individuals who set goals that are both specific and difficult perform better. While this theory is definitely applicable to realms such as business and education, can it also be applied to investing?
While setting goals might not make your investments perform better, per se, goal-setting behavior can influence your behavior as an investor. For one thing, you'll be able to more accurately measure your portfolio's performance toward your specific benchmarks. Rather than setting an arbitrary benchmark — like the S&P 500's performance — you can set measure progress toward your specific goals. That means that even if pieces of your portfolio are underperforming, as long as you're still on track to meet your goals, you can rest easy... and not react emotionally to market ups and downs.
And therein lies the beauty of goal setting: When your investments are tagged to separate, specific goals, you can more easily fight the urge to react to market volatility. So if the market takes a dive, you'll be less likely to panic and sell... thus avoiding the unnecessary costs and fees associated with jumping in and out of the market, not to mention missing the potential to earn returns when the market bounces back — as it has after every crash, including those in
1929, the Great Depression, 1987, and 2008.
Strategic Investment Planning Means Specific Goal Setting
Just as in the workplace, success of achieving your goals comes with specific goal setting. Your investment goals should be relevant, meaningful, and specific to your individual situation and needs. Think about your financial priorities; do you want to save money for your children's education? Buy a bigger home? Save for a comfortable retirement? What is the retirement age you are targeting? What do you dream of doing? Do you want to leave a legacy to your family?
The answers to these questions will determine where and how you invest. Factors such as your time horizon and your tolerance for risk also play a role in your goal-setting process. Map out your goals within your time frame, with short-, medium- and long-term goals included, then work with your wealth advisor to determine the optimal blend of assets for your portfolio. Timeframes for investment goal setting may include:
- 10+ years: A balanced portfolio with a truly diversified blend of stocks and bonds; may start with higher risk investments that shift to lower risk as the time horizon shortens
- Three to 10 years: A blend of stocks and fixed-income investments; proper diversification through asset allocation spreads risk
- One to three years: Short-term buckets may consist of lower risk investments, such as fixed-income and CDs to protect investments while buffering against inflation
- Less than one year: Minimize risk in a savings or checking account
Take time to sit down with your wealth advisor and walk through your options. Making goal-setting part of your financial planning process will benefit you... and your portfolio.