An important part of the financial planning process is defining the reasons why you are investing in the first place. By taking the time to consider the bigger picture at the outset, you can enhance the probability of achieving your desired outcomes, by matching appropriate strategies to your targets.
What stage in life are you at?
Broadly speaking, many investors fall into one of two categories. The first are those who are accumulating and building wealth and assets over time. These clients are often younger or middle aged and are able to save regularly (either via a pension, an investment vehicle, or both).
The second category are those who have already accumulated wealth, and are looking for that wealth to perform a function in later life. This cohort are often approaching retirement, or have already retired, and instead of looking to regularly save towards their goal, they are looking for the accumulated funds to either provide an income (through a personal or defined contribution pension, or investment plan) or achieve further growth (to provide a larger inheritance to family).
Aiming at the goal
Irrespective of which category an individual falls into, it is important to break down your thinking and define short term and long term goals. Both the short and long term goals may well aim to achieve a similar outcome, although sometimes the goals can be very different.
Take the example of a married couple aged 30, with two children. They both earn good incomes and manage to save regularly each month. After speaking to an adviser, they have considered their goals in the short term. Firstly, they want to make sure they have an emergency fund held in readily accessible funds, to provide for life’s unexpected costs. Secondly, they hope to be able to afford private education for their children. They have therefore decided to invest for the medium term by regularly saving into an investment strategy designed for growth to meet the target date at when funds could be needed to fund private education costs, by funding regular withdrawal to meet the expected annual costs.
In the longer term, they want to make sure that they can afford a comfortable retirement and therefore are also committing funds into a pension arrangement, to try and achieve a good level of pension savings from which to provide retirement income.
The three goals (two short term, and one long term) have completely different time horizons, and therefore it would be appropriate to consider investing in a separate strategy for each goal. In this way, the most tax efficient method can be selected, and the choice of investments be tailored to suit the target of each goal. This is certainly a more sensible approach than simply holding a single savings pot, that doesn’t match any of the stated objectives.
For clients reaching retirement, the goal of many is to provide a sustainable retirement income. This can be achieved via a number of methods, using existing pensions, and investments accumulated through life and also possibly through inheritance. For these clients, defining the level of income needed to meet expected outgoings is very helpful in tailoring the strategy to generate the correct level of income. These clients often have other objectives in mind, for example, the ability to pass on wealth earlier to younger family members by way of gift. Again, careful thought and planning can maximise the tax efficiency of these transactions.
Lastly, the longer term objectives may be to leave significant wealth to the next generation in a tax efficient manner. The three objectives identified are likely to impact on each other, and clearly defining goals and targets at the outset can help prioritise your goals and aspirations.
Review and revisit
Whilst giving careful consideration and clearly defining investment goals is an important part of the planning process, reviewing and revisiting those goals is equally important for two reasons.
Firstly, goals change over time. Life is often unpredictable and life events and changes of plan can lead to a clearly defined goal at the outset becoming less important. Let’s look again at the married couple in our example above. They receive an unexpected inheritance that covers the private education costs for their children and therefore they do not need to plan for this expense when the children reach school age. They can, therefore, alter their priorities and focus on their other short and long term goals.
Secondly, it is important to review and consider whether investment goals remain achievable by considering performance of the investments regularly to see whether they are on track to reach their target. If investment markets are underperforming, committing greater savings to the stated goal could help get the plan back on target. Conversely, if investments perform above target, this may allow regular savings investments to be reduced, releasing funds for other uses.
Engage with a holistic financial planner
Planning for investment goals is an important area where holistic financial planners can add significant value. By engaging with a trusted adviser, they can assist in defining investment goals at the outset and work with you over time by regularly reviewing your goals and expectations and whether the strategies put in place are on target to achieve that goal.
At FAS, we always take a holistic view, and really take the time to understand your investment and financial goals. Our comprehensive regular reviews not only cover the performance of recommended investment strategies, but also whether these are on target to meet your goals, and whether any changes to the strategy are needed.
If you would like to review your investment plans to see whether they meet your goals, then please get in touch with our experienced financial planners here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstances.
