How to Determine Your Investment Goal?

By 401(K) 2013 @http://www.flickr.com/photos/68751915@N05/6736161971/

15 Aug How to Determine Your Investment Goal?

There are gurus who tell you to invest for dividends.

There are gurus who tell you to invest for capital gains.

There are gurus who tell you that you cannot beat the market.

There are gurus who say you should pick your own stocks.

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There are gurus who say you should not buy and hold, and should just time the market.

With so many varying advice, no wonder our retail investors are confused. And investors no longer know what they want. In fact, they stop asking what they are trying to achieve through investing or trading. They resort to listening to gurus who they felt are most convincing.

Sadly, that is not the way to go. The guru’s investment goal may be greatly different from yours. Not knowing your investment goal is like not knowing where your target is as an archer. Without a target, where shall you aim or shoot? You cannot shoot at a target that does not exist.

This post aims to bring back that emphasis on your investment goal.

2 Main Types of Investment Goal

There are 2 main types of investment goal. They are Cashflow and Capital Gain. For example:

  1. Cashflow Goal – I want to make $5,000 a month in 3 years’ time.
  2. Capital Gain Goal – I want to have $1m in 10 years’ time.

I have also written another post about the roles of Cashflow and Capital Gain.

Investment Goals

Is your Investment Goal Realistic?

 

Another common problem is that investors do not have a realistic returns to benchmark themselves. The strategies and their corresponding returns are stated below. These are what I deem as reasonable returns, some of you may argue the returns should be higher. But hack, let’s be more conservative for once.

  • STI ETF – 8% per annum (capital gain + dividends)
  • Dividend investing – 5% per annum (dividends only)
  • Value Investing – 12% per annum (capital gain + dividends)
  • Trading for income – 2% per month (capital gain only)
  • Trading for capital gains – 12% per annum (capital gain only)

How to Check the Viability of your Investment Goal?

 

Cashflow Goal: Assuming you want to have a cashflow goal of $5k per month, you can choose Dividend Investing or Trading for Income.

  1. You can go for dividends and invest $1.2m ($60,000/5%).
  2. Or to trade for income, you need to trade a capital of $125k ($5,000/2)/2%), assuming 2x leverage.

For no 1, it is relatively safer as you are not required to time the market. You just need to buy and hold for the dividends. The downside is that you need a sizeable capital which most people do not have. Another way is to break up the goal into 2 steps. Invest for capital gain first, ie, buy low and sell high and aim for a return to hit your $1.2m target. Thereafter, you can achieve $5k per month by investing for dividends.

You need less capital for no 2. The downside is that you have to take more risk and put in more effort to trade the market, and suffer the emotional turmoil when you do not achieve your profit target.

Capital Gain Goal: Let’s assume you want to achieve $1m in 10 years. You can go three ways.

  1. Invest in stocks with the intention to buy low and sell high, and not to hold forever. Each investment period can last a few years. With 12% returns per annum, you need to invest $325k to achieve $1m in 10 years.
  2. Trade the market by timing entries and exits. Each trading position can last from days to months. Similarly, 12% per annum is a reasonable return. You need to trade with a capital of $163k (assuming 2x leverage) to achieve $1m in 10 years.
  3. If you are not interested to pick your own stocks or trade the market, you can choose to invest in an index fund like STI ETF. In this case, you will need $465k to invest for the next 10 years to achieve your $1m dollars.

Many people expect trading to make money faster than investing. It is not true after we take a larger sample size of the results, and factor the transaction costs. In general, it is reasonable to assume 12% returns as a target. Again, let’s be conservative and not be overconfident that we can achieve 30% per annum and sustain such returns for 10 years.

It is up to your preference to invest or trade, since both returns are expected to be similar. If you think you do not have the skills or interest to do either, go with passive investing in an index fund.

Know Your Target

To conclude, you need to know what you want to achieve, so that you know which strategy is suitable, and what is the reasonable returns to expect. Of course, the other consideration is whether you have the skills and efforts required for each strategy to work. I hope this post has given you a reality check.



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3 Comments
  • 15 HWW
    Posted at 09:04h, 16 August Reply

    Hi Alvin,

    I agree that there are two main types of investment goals and it’s indeed beneficial to know which type of target one is aiming for to calibrate the strategy. But I also think that in most circumstances, these two goals are not mutually exclusive. It’s possible to make minor changes to the portfolio for it to be more suitable to a particular type of investment goal.

    For example, I started off 3 years ago aiming to accumulate $1 million before 40. However, my philosophy towards working has changed recently and now, I am more interested in the passive income my portfolio generates. However, I still feel that the portfolio is largely relevant and a heavier focus towards dividend stocks in the future should be able to address the issue.

    • Alvin Chow
      Posted at 11:20h, 16 August Reply

      Thanks for commenting!

      First, it is okay to change goal along the way as one gets clearer about what he wants.

      Second, you need a critical mass in order for the dividends to be meaningful as an income. Hence, you probably have reached this point such that capital gain is less important to you.

      Third, it is not easy to achieve both type of goals at the same time. Sometimes, the best dividend stocks may not give the best capital gains, and vice versa. It is okay to have a different focus at different stage of your investment journey.

  • Big Fat Quiz
    Posted at 10:58h, 05 September Reply

    […] You should know this one already. We cannot emphasize this more. Know yourself. Know if you are trading or investing before […]

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