When you see Usain Bolt sprinting, it is like a flash in the pan. He springs up and off he goes flying towards the finish line. Mo Farah and other acclaimed long distance runners on the other hand are more about maintaining a steady pace. Watching them run is more about consistency and endurance. Believe it or not, achieving your financial goals is very much like running a marathon. It requires the same dedication, patience and commitment as a marathon.
Some of your goals are short term and others medium and long term. So the whole process of investing for goals is an ongoing and continuous process and not just a few transactions. What you need to remember is that your objective is not being the fastest runner over 100 metres or even 200 metres but to maintain a steady pace and win the 5 km or 10 km marathon.
What you need to look at is building up the stamina to complete the long distance race. In other words, making a fast buck by churning your mutual fund or stock portfolio, getting in and out of investments while trying to time the markets may reap you rewards in the short term, but in the long term such steps hardly matter and may actually be detrimental.
Set your goals, priorities them and develop an asset allocation strategy based on which you invest your money.
1. Pick Liquidity first for short-term goals If you have goals like a loan that has to be repaid, a vacation, down payment of a house or car coming up within the next 18 months, put money aside for this in liquid assets like short term or ultra short term debt funds. Besides this have 2-3 months of expenses always in a liquid fund to deal with any kind of emergencies. But ensure that you don’t have too much; if there is more than 2-3 months expenses lying in your bank account or these liquid funds, then your funds are idle.
2. Try to link assets/investments to goals long term assets like EPF, PPF should be used for goals like retirement. Invest in mutual funds for a goal like child’s education and don’t touch this investment for anything else. Maintain that discipline.
3. Aim for appropriate returns where your real return is atleast positive. i.e. when you deduct the effect of taxation and inflation from the return earned, there is still something left!
4. Understand the risk return payoff. For higher returns you have to take higher risks no way around it. Having said that some risks have to be taken where meeting the goal is of utmost importance.
5. Don’t get into a trap of over analysing. Hindsight is always perfect. Learn from your mistakes and move on.