Making more money without defined financial goals is not prudent. One sentiment commonly shared by most Kenyan investors is the expectation to generate great returns from their investments but explain what they intend to do with the income. Many people hardly have financial plans and this can be attributed to the low level of financial literacy.
Any successful investment process should entail a detailed analysis of objectives factoring in time horizon, willingness and capacity for risk, level of income and many other factors in order to accomplish their goals. This is the foundation of goals-oriented investing.
However, what should matter most to investors is whether the investment option they select is uniquely designed to help them achieve direct results in line with their financial goals. Focusing entirely on outperforming market returns as the goal has not always served investors well because they do not directly relate to their objectives.
What one should always be thinking about when investing is whether their portfolio can fund their current lifestyle and their goals, instead of focusing on how they are going to invest to beat the market.
Different goals require different risk profiles and an investor can decide on his/her preferred level of risk that will not only earn a return, but also fulfill the goals.
Investments in the Kenyan market have a delicate balancing act between risk and reward. In this case, it is always wise to compare opportunities offered by different products or portfolios such as money market, stocks, bonds, real estate etc.
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It is commendable that more investors have developed an appetite for this concept of investing as it reduces risk. At the same time, many people are still held back by the fear of losing money or making uninformed decisions when investing because they do not always understand the underlying risks.
For instance, when investing for an emergency fund, one should hardly take on any risk because as much as it will provide very little returns, it will guarantee security over the money and ensure accessibility when needed. In the event of a market hiccup, investors are less likely to panic. A retirement fund that might not be needed for 20-30 years can tolerate significantly more risk.
Goals-based investing
Goals-based investing is similar to a well-known money-saving strategy known as the “envelope system”. The idea is to save for your goals by putting money in different envelopes labelled with an individual’s goals. It could be shopping, transport, clothing or furniture.
With goals-based investing, an individual can save for higher expenses such as down payment for a home, paying for their children’s college education, buying a car or going on vacation.
Goals cost money, so the advantage of building an investment portfolio around goals is that one can measure how much they cost, and can estimate how much will be needed in the future.
The key to wealth creation is intentionally investing with a focus on goals instead of risk tolerance
Kevin Mwangi, Amana Capital
To create successful outcomes from goals-based investing, one can work with a financial advisor in analyzing his/her financial situation, setting a number of financial goals under different time prospects and determining where best to invest. Progress on the same can be measured by monitoring how the individual’s portfolio is aligned towards the set goals.
The key to wealth creation is intentionally investing with a focus on goals instead of risk tolerance. Success in investment performance is only meaningful if it ends up funding an important outcome or goal.
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