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Investment Goals

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Asset types

Shares (equities, stocks)

If you own shares in a publicly listed company, you own a small part of that company. Listed on stock markets, share prices move up and down depending on investor supply and demand. Investors can make money from their shares mainly in two ways:

  1. when the company pays out some of its profits to shareholders via a dividend, either in the form of cash, additional shares, or both

  2. by selling their holdings on the stock markets for more than they paid.

An attractive feature of many shares is that they are easy to buy and sell (‘liquid’). However, they can also be volatile, meaning the price can quickly move higher or lower. Examples of this might include a company being taken over at a premium or sold down if it reports disappointing results. Among traditional assets, shares have historically delivered the best long term investment returns.

Strength

Low liquidity risk

Weakness

Affected by market risks

Risk Ranking

risk ranking high

Bonds (fixed income)

Bonds, also known as fixed income because they pay a fixed interest rate to investors/creditors, are an ‘IOU’ by an issuer who will make cash payments to investors on a regular basis.

Governments and companies are the largest issuers of bonds. They can be issued for a wide range of time scales before maturing – anything up to a couple of years is being short term, between two and ten years regarded as medium term and between ten and thirty years is viewed as long term. Bond issuers will usually pay a higher rate of interest on a long term bond. In addition to the regular interest payments investors receive, at maturity (i.e. when the bond is repaid) the original amount the bond holders invested will also be returned.

Bonds are not risk free. Credit risk, also known as default risk, is the danger that the bond issuer, either a government or a company, could default on its coupon payments (so-called because historically bonds existed in physical form and were issued with ‘coupons’ attached to them) or the repayment of the original amount. The risk profile of the government or company issuing the bonds informs the level of interest paid (eg. a higher level of interest paid to compensate for a higher risk profile).

Strength

Lower market risk

Weakness

Affected by credit risks

Risk Ranking

risk ranking low

Real estate (property)

Dominated by residential property, this is the world’s oldest and largest asset class with a total value estimated recently as more than the combined value of all global equities and debt securities.

Investors can act directly as landlords, earning a return by charging rent on commercial and residential properties. They can also invest indirectly, owning a share in a portfolio of real estate through a real estate investment trust (REIT). Traded on stock exchanges, REITs can be bought and sold like any shares. Both direct and indirect investors in real estate will benefit should the property rise in value and be sold at a premium.

Investors may find property an appealing option as it gives them the chance to buy something tangible. Real estate also has a low and sometimes negative correlation with other major asset classes, making it an attractive choice of asset for its diversification benefits.

However, it can be difficult to sell in a crisis, meaning investors may be unable to get their money back when they want it or they might be forced to accept a lower valuation. This ‘liquidity risk’ is the main reason it should be considered a long term investment.

Strength

Lower market risk

Weakness

Affected by liquidity risks

Risk Ranking

risk ranking intermediate

Alternatives

An alternative investment is the umbrella classification for a broad range of assets that do not fall into one of the other conventional investment categories (incl. stocks, bonds and cash). Alternative investments often have low correlations with these traditional asset classes.

Examples of alternatives include infrastructure investing, private equity, commodities and collectibles. Real estate is viewed by some investors as an alternative investment, while crypto-currency is a relatively recent addition to this asset class.

Alternatives are often favoured by institutional investors and high net worth clients, attracted by the potential for outsized returns and because of their diversification benefits. Commodities, for example, may be considered effective hedges against inflation. Yet depending on the instrument to be invested in, alternatives can be complex, risky and provide less liquidity compared with traditional assets. This means that investors may find them difficult to sell should cash be required quickly. A lack of regulation and transparency may be further concerns depending on the specific asset.

Strength

Can reduce inflation risk

Weakness

Affected by liquidity risks

Risk Ranking

risk ranking very high

Cash

Cash is generally regarded as being the safest place to keep your wealth, which is why it is often a great place to park short-term money (in nominal terms, one dollar will always be one dollar). Cash refers to physical currency, the balances of savings and current accounts, tax-efficient wrappers and money market funds. Risk averse investors favour cash for its two key attributes:

  1. Liquidity: instantly available, cash held during a market downturn could allow investors to purchase undervalued assets at a discount.

  2. Stability: Other assets such as shares and bonds may also be easily tradable but variable pricing makes these more volatile. Another feature of cash is that its returns tend not to be correlated with other assets, making it a potentially important tool for diversification.


The downside of cash is that inflation can chip away at the real value in an investor’s pocket. Over time, those who only hold cash can see the real value of their savings fall. That’s why it should be considered as part of a diversified investment strategy.

Strength

Low market risk

Weakness

Affected by inflation risks

Risk Ranking

risk ranking low

Goal setting in life is important because it can help individuals to focus their behaviour and remain motivated. This in turn can lead to better performance on tasks, helping contribute towards higher levels of personal and professional success. The story is no different in finance.

Setting financial goals for investors allows them to focus on decisions that will contribute to their overall objectives, rather than monitoring the outcomes for a range of individual investments. This is important because individual investors are prone to the ‘disposition effect’, a widely documented behavioural bias whereby investors are more likely to sell their better performing holdings than their losses. Over time, this effect can adversely affect total investment returns.

Yet faced with constantly moving financial markets, the possibility of changing financial circumstances or investment requirements, as well as a wide range of financial products and capabilities, investors need to put in place a robust and realistic investment framework.

Investment Goals Podcast

AXA IM Select’s Lorna Denny sat down with Capital Group’s Claire Swinden to discuss how investors might approach their investment goals and the importance of investment planning. Concise and highly informative, it highlights some essential issues for consideration as well as providing investors with a helpful checklist.

The first in our Investment Basics podcast series, it’s ideal for those starting out on their investing journey but should also prove useful for more experienced market participants. Happy listening!

Statements attributed to an individual represent the opinions of that individual as of the date published and may not necessarily reflect the view of Schroders or its affiliates.

Lorna Denny

Good morning, everyone, and welcome to the first in our series of Investment Basics podcasts. My name is Lorna Denny, and I'm delighted to be joined today by Claire Swindon from Capital Group. We will be discussing how investment goals lie at the heart of your own investment plan. Good morning, Claire.

Claire Swindon

Morning, Lorna.

Lorna Denny

It's often said that from little acorns, mighty oaks grow and the same could be said of investments, regular investment at an appropriate level of risk might, over time, bring you closer to your investment goals. And it's worth bearing in mind that although a professional investment manager might be best qualified to oversee your investments as they grow, the very first step sits with you.

Claire, thank you for joining us. Would you agree that having clear objectives for your savings can be the best way to start a successful investment plan? 

Claire Swindon

I think you're absolutely right, Lorna. The first step really is to set some goals and create that plan. And interestingly, the starting point might not be thinking about numbers and investments, but actually, what do you want to achieve? What do you want to achieve in life? What goals are you looking for? Topics like when do you want to retire? These are the really important questions to start with.

Lorna Denny

Yes, I understand from what you're saying that really this is personal also that not every set of investment goals is the same.

Claire Swindon

That's right. You know, everyone's going to come to this tunnel conversation from a different point. You might be just starting out in your working career or someone who's closer to retirement. But I find it's really helpful to maybe think about three things, and I call them the three E's. So it should hopefully be easy to remember. So first of all, what are your essential goals?

And these are the absolute necessities for day to day living. Thinking about your sort of annual living expenses. And then after that, I guess the next layer up would be thinking about enhancer goals. So what would you like to achieve, but you could live without, depending on what you're interests are. This could be saving up for a special trip, saving for a deposit for a home.

And then final E is I would think of as endowment goals. So maybe more aspirational goals. Say this could be about leaving a lump sum to charity. Or what do you want to think about in terms of inheritance for your children? So things that are perhaps, you know, more aspirational in nature and maybe a little bit further away as well.

So thinking about those three E's helps you maybe break down what you're trying to achieve.

Lorna Denny

That's rather useful and the three E's are indeed a handy way to remember those points. But if we could just unpack what you said there a little more and with perhaps a bit more detail before we make a start on the actual investment elements.

Claire Swindon

I'll think about another three things, maybe to put a bit more clarity around those objectives and goals. First of all, what's your priorities? What is it you want to achieve first? Thinking about those enhancer goals, you might have a few different things. You want to get that vacation. The home deposit. Which of those you want to put first in the running order?

Then what's your investment horizon? What timeframe are you thinking about achieving some of these goals around? And then finally, risk tolerance. Thinking about risk is how confident you want to be about achieving those goals. How certain do you want to be that you're going to realize those visions that you've set for yourself?

Lorna Denny

Yes, indeed. And we will come on to this idea of risk tolerance shortly. It is one of the crucial points that an investor should be happy with before setting out on this investment journey but firstly though what other questions do you think they might consider?

Claire Swindon

I like to think about creating that financial vision. Long term, your vision could be around topics like when I want to retire, where do I want to be living in retirement? And some of those more endowment focused pieces. So do I want to be leaving money to children, charities, friends and family but perhaps in some of the shorter term pieces, do I want to buy a home?

Claire Swindon

Am I planning to take an extended leave from work? We think about people taking a break to have a family, but it could also be for other reasons taking a break. And then do I want to change things over time so I might be working for a larger company now, do I want to start a business in the future?

And I think critically is has this changed at any point? So it's not uncommon for our vision to change over time. We're talking about starting here, but I think it's one of those journeys that you'll keep revisiting over time.

Lorna Denny

Essentially, you raise that point because the term investment generally carries with it the notion of a medium or longer term timeframe. But as you say, this could change. So would you say choosing a timescale for a given investment goal is a reasonable starting point?

Claire Swindon

Like all good things in life, timing is absolutely key and setting that investment horizon is a really critical part of your goal setting. I keep talking about retirement today because I think that's a goal most of us look towards. But retirement goals tend to be quite long term and maybe allow you to have a little bit less certainty and maybe take on a bit more risk.

But something that's got a shorter term time horizon and say maybe you want to save to help with university tuition fees for your children, you need to have a bit more certainty around that. So time horizon, the question is a really critical one.

Lorna Denny

So let's say we have identified an investment goal which naturally is set for a date in the future. The big question now is how this goal can be reached in the timeframe available. And it's not just a question of setting money aside, is it? There is the key consideration of how fast we'd need that money to grow, as you suggested that in order to hit the target.

And I think this is where risk tolerance or investment risk come into the equation.

Claire Swindon

So I think we can make risk into something a little simpler to think about because it is a really big part of investments. So what we're really thinking about is the chance that you're not going to reach those objectives that you set for yourself. So what is the outcome you want and how likely you are to reach it?

And I find feeding on the idea of confidence. Is it a practical way of thinking about it? So how confident do you need to be for those objectives you set? And if you go back right to the beginning, when I talked about the three E's for those essentials, there's critical costs that you have every year. I suggest that you want to have a pretty high confidence level.

So let's say you want to be over 90% confident for the enhancers. You can probably take a little bit more risk. Maybe you don't have to be quite so confident that you're going to achieve exactly the goal that you're setting. So let's say 75%. And then for the final group, there's a longer term endowment ideas. You can probably give yourself a lower confidence level. Say I'm going to say around 50%. What I'm not saying is you're looking to not achieve those goals, but you're prepared to take more risk, have more variety of outcomes against those goals.

Lorna Denny

And suddenly the investment risk starts to be a little clearer. And that's very helpful about the confidence level. And there are, of course, going to be differing levels of risk out there.

Claire Swindon

You're right, there are different risk levels we can think about. We've talked about sort of short, medium, long term in time. When we think about time, I think for risk, you can sort of think about low medium highs. Terms you might see on investment products would be things like conservative, moderate, aggressive to sort of reflect against those. But broadly, what we're saying is higher risk assets may have the potential to give you high return, but you're going to have to be comfortable with a bumpy ride using some financial language, more volatility in that, lower risk investments probably will give you a lower return stream, but perhaps a less bumpy ride, a less volatile or steadier return

And that's the trade off that you're going to be facing when you start to look at how you're going to execute on some of these objectives you set for yourself.

Lorna Denny

On a theoretical level. But I can see it's very important to be both familiar and also comfortable with the level of investment risk you're going to need to reach your own investment goals. But on a practical level, it's also important to feel happy with the level of contributions, whether they be one off or regular that are going to be needed to reach your target.

Claire Swindon

You're right. We really need to start all of us with what's affordable. Going back to the beginning, we might set ourselves rather exciting goals, but we have to start with what's really practical for us to save each month. And I think there's two ways to think about this. If you're somebody who's got a regular monthly salary having maybe a discipline around putting that salary into different pots could be a really good way to go about it.

Say you've got a certain amount of money that's your essential spend each month and then you allow a certain amount just automatically to go into your investment or savings account. That's great if you're on a monthly payment schedule, if you're somebody who perhaps works around projects or is more commission based, your income probably looks a little bit more lumpy and so that might not be the most sensible approach for you. It might be that you look to put a certain amount towards your essential costs and once you've reached that point, you could then have a sort of discipline around putting money into investments. But you will notice I've said the word disciplined twice in my explanation because really that is the key to have a methodical, systematic way of approaching this, because that is the surest way to make sure you actually do it.

I'm sure we all have examples in our life where we need to have routine and structure to make sure that we follow through on our best intentions.

Lorna Denny

Yes, I think we probably do. But from what I'm hearing then, regular saving is really the tried and tested method of hitting your target.

Claire Swindon

I absolutely agree. And I think the other thing that that brings the other really strong benefit, is it takes some of the emotion out of it. You know, every day we're greeted by headlines about what financial markets are doing in times of exuberance. When markets are strong and going up quickly, that tends to be when people make investments.

Essentially, people are buying high, so buying in the expensive markets. And when we wake up in the morning and read headlines about stock markets falling and bad economic numbers, that tends to be when people don't feel confident about putting money into the market. So essentially, people don't buy at the low points and do buy at the high points if you allow your emotional sense to drive you.

So having that sort of regular discipline about investing actually allows you to sort of take some of that emotion out and stops you timing the market, which is really a very tough thing to get right. And many very experienced fund managers don't find that easy to do. So having the discipline about a regular investment contribution is the key way to take some of that emotion away.

Lorna Denny

Yes, I can see what you're saying. But isn't this style of saving more suited to large investors?

Claire Swindon

Well, I think one of the great thing that's happened in recent years is just how accessible making investments is. Way back, you would have had to go to a stockbroker and have a larger portfolio. But actually nowadays it's quite easy to invest. You know, the minimum investment months are small. You can make small, regular contributions. Getting into the markets is easy and an expression I love that I learned from one of my colleagues. That is, it's all about time in the market, not timing. So the benefit is actually just about getting invested. Even if you choose all the theoretically wrong moments to enter, it's still better over the long term to actually have been invested and take advantage of market returns and just the compounding effect of actually being invested and continuing to grow your assets.

Lorna Denny

Yes, indeed. And one of my favourite facts is that was it not Einstein? He said that compound interest was the eighth wonder of the world.

Claire Swindon

I do love the power of compounding.

Lorna Denny

Yeah, indeed. So now we have this investment goal and we have a plan as to how it could be achieved, what could possibly go wrong?

Claire Swindon

Well, first of all, none of us has a crystal ball. We can't predict what governments will do about tax treatments where the market's going to go. But I'll say it critically, our lives change it. Who will know what will happen about your earnings, your health. So you have to be prepared to be flexible. I think that's really critical. But I think what's so important about having that regular saving stream that we talked about, so the regular investment stream is actually that should, if you have the right approach and goal setting, should allow you to actually weather some of those storms.

So hopefully if you've been prudent and have those essentials well covered, you should be in a good position if life just maybe threw a bit of a curve ball.

Lorna Denny

That is very helpful advice. And is there any last piece of advice that you could share with us before we set out on this journey?

Claire Swindon

I think I would just say, don't be afraid of mistakes. We don't know what's coming next, but setting some really important, prudent goals for ourselves, first of all, allows you to have a great conversation at home potentially about where you want to be in the future, but also really allows you to take some of the emotion and fear out of making these sort of decisions.

And I guess the final thing I would say is investing in markets really is an accessible activity for people, and we shouldn't be frightened to take that first step.

Lorna Denny

Thank you, Claire. And these are wise and reassuring words. So here's my summary then my five key takeaways on investment goals. Number one, it's your plan. Only you can set the ball rolling. Number two, have a clear idea of the time you will need to hit your target. Number three accept that all investment carries risk that you can choose the level of risk that suits you.

Number four, make sure that your budget can stretch to the contributions you'll need to make. And number five don't panic. Markets will always throw up surprises, but staying invested for the long term is considered one of the best ways to achieve your investment goals. Thank you, Claire, very much indeed.

Claire Swindon

Thank you, Lorna. It was lovely to join you.

Lorna Denny

And why not join us for our next podcast when we will be having a clear look at understanding risk.

Our goals can only be reached through a vehicle of a plan, in which we must fervently believe, and upon which we must vigorously act. There is no other route to success. Pablo Picasso

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Architas’s Lorna Denny sat down with Capital Group’s Claire Swinden to discuss how investors might approach their investment goals and the importance of investment planning. Concise and highly informative, it highlights some essential issues for consideration as well as providing investors with a helpful checklist.

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