The First Step to Investing: Understand Your Goals

February 12, 2020 · 8 minute read

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The First Step to Investing: Understand Your Goals

When it comes to investing, most people start with What. What should I invest in? What should my portfolio strategy be? What stock should I invest in?

But there’s actually a more important place to start: Why. Why do you want to invest in the first place? Why are you building a portfolio?

Selecting an investment strategy largely depends on your financial goals. This is sometimes an overlooked first step in building a sound investment strategy.

You can’t plan the right portfolio unless you know what you want to save for, how much you want to save, and when you’d like to use that money.

You might think of building an investment strategy as a top-down approach. Start with the big picture idea of what you want to accomplish. Then, hone in on the strategy that makes the most sense given those goals. Should you even be in stocks, or in bonds? Or should your money be held in cash? Or, should you do something else entirely?

Setting Your Financial Goals

First, you may want to consider these two recommended goals: Creating an emergency fund and saving for retirement. These are sometimes referred to as “bookend goals, because they are your primary short-term and primary long-term financial goals. From there, how you prioritize your other goals is entirely up to you.

Creating an Emergency Fund

Your emergency fund is a lump sum that you can easily access should an emergency arise—for example, if you get laid off or face unexpected health costs. It is common knowledge that this fund be three to six times your monthly spend, depending on how risk-averse and well-insured you are.

Consider Asking Yourself:
•   How much do I spend each month?
•   How much of that is necessary spending, and how much is discretionary?
•   How many months’ expenses would I like to have saved?
•   Do I have dependents or others that live off my income?
•   What’s my target emergency fund?

Creating a Retirement Fund

Retirement may be your largest long-term financial goal, and even if it feels very far away, it’s helpful to start saving early. Why? The earlier you start saving, the more time your money has to work for you.

Consider Asking Yourself:
•   At what age do you want to retire? For those born after 1960, full Social Security full Social Security retirement age is 67 .
•   How much money do you need to live on each year (in today’s dollars)?
•   How long do you expect to live? Statistically, those born in the 1980s have a life expectancy of about 79 years, but to be safe (and optimistic), you may want to plan for (much) longer.
•   What do you currently have saved for this goal? You may want to use a retirement calculator to see if you are on track.

Your In-Between Goals: Houses, Families, Businesses, and More

How you prioritize everything in-between your emergency fund and retirement depends entirely on you. For example, do you want to buy a home? Start a family? Launch a business? Go on an epic month-long vacation? Many of the above?

Any goal you can think of is on the table. You may want to be specific—exactly how much money you need to achieve each goal, and by when. Why? If you’re specific, you’ll have a much higher likelihood of reaching that target, when the time comes to use that money, you’ll have already given yourself permission and can enjoy it.

Consider Asking Yourself:
•   What is your goal?
•   When do you need the money?
•   How much do you need?
•   How much can you save each month?
•   What may be some obstacles that could come up?

Starting Your Investment Strategy

As you’ve seen in the exercises above, each of your goals has a specific time horizon. This leads to an underlying investment strategy: Generally speaking, the longer the time horizon, the more risk you can afford to take, because you can weather market volatility.

When making a decision about how to build a portfolio, you may want to keep in mind that risk and reward are two sides of the same coin. You cannot have one without the other.

There is no such thing as an investment that is high reward with no risk. (If someone promises such an arrangement to you, you may want to run for the hills—it’s probably a scam.)

Oftentimes, risk comes in the form of volatility, which is how much the price of an investment type fluctuates. Although these fluctuations are often temporary, it can take months or even years for returns to even back out to their historical averages.

Short Term (Less Than Three Years)

For goals like: Setting up an emergency fund, travel, buying a new car.

A good rule of thumb is to keep any money you need within the next three years “liquid,” or available to access as soon as you need it. For example, the whole point of having emergency cash is to have access to that money without worry.

Additionally, it is unlikely that you will want to subject money designated for the short term to the volatility of investments like the stock market. The biggest risk you take with short-term money is losing any of it at all, so you’ll probably want to keep it in cash.

If you have a higher risk tolerance, you can consider investing some money for short-term goals in a conservative portfolio that will pay a higher interest than a savings account, but that still has a low risk of losing money. If you go this route, you may want to remain flexible about when and how you tap into those investments.

Your cash can be held in a savings account of your choosing. You may elect to keep this cash in an interest-bearing savings account where you can earn interest on your cash savings. You may even find it helpful to open multiple savings accounts, giving them distinct names, in order to keep track of your various goals.

Medium Term (Five to 10 Years)

For goals like: Home purchase, starting a family.

With a time horizon of five to 10 years, you may be able to afford taking some risk with your money and give it a greater chance to grow. For these types of goals, you could potentially choose a moderate or moderately conservative portfolio.

Depending on your comfort level, this portfolio may hold a combination of cash, other fixed-income investments, like bonds, and some stocks.

More than likely, you’ll hold these investments in an investment account, which is sometimes also called a brokerage account.

For goals where you’re investing money for the mid-term, it generally does not make sense to use a retirement account like a 401(k) or Traditional IRA. You could be penalized for pulling the money out before retirement.

Medium to Long Term (10-20 Years)

For goals like: Child’s college savings, second home

With a time horizon of 10-20 years, you may be able to afford taking more risk with your money in order to take advantage of the power of compounding.

Depending on your comfort level, you may want to consider a moderate to moderately aggressive portfolio. Generally, the longer your investing timeline, the more risk you can take. This may mean building in a higher allocation to stocks and bonds.

Investments for goals with a pre-retirement timeline should be held in an investment or brokerage account. For a child’s college, consider using a 529 Plan which provides some tax benefits to those that are saving for the purpose of higher education.

Long Term (20+ Years)

For goals like: Retirement, financial independence

For long-term goals, time may be on your side. Having several decades or more gives a portfolio time to weather the ups and downs of the market and economic cycles. This allows an investor to take on more risk with the hope of more reward.

With this in mind, you may want to focus on aggressive growth while you are young, and then shift to a more conservative investment allocation over time. Depending on your comfort with the stock market, this may mean allocating a majority of your portfolio to the stock market or other high-risk, high-reward investments.

To save for retirement, you may want to consider investing in an online IRA, a 401(k) plan, or some other retirement-specific account. Retirement accounts have benefits when it comes to taxes, such as deferment on paying taxes until you withdraw from your 401k, or the ability to withdraw contributions from your Roth IRA early without penalties.

What’s Next?

Once you’ve outlined your goals, you’ve completed the first step of investing.

A good second step? Learning more about the investment options that are available to you. This will aid you in building a portfolio that will help you achieve your goals.

A good place to start is learning the different asset classes and their respective risk and reward profiles. If you are going to be invested in something, it’s helpful to know what to expect. Proper expectations may make you a more successful long-term investor.

Another option is to set up a complimentary appointment with a SoFi financial planner, who can help you define and quantify your goals and discuss the potential investment strategies to reach them. With SoFi Invest, this service is complimentary.

Depending on how involved you would like to be, SoFi has options for building your own investing portfolio or having an automated portfolio built for you, with your goals in mind. There are no associated costs or fees with utilizing either investing option.

Investing isn’t just for the wealthy; it’s for anyone who wants to achieve financial goals. There are low-cost, simple, and effective investing options that are accessible to investors of all sizes. You could get started today with a few clicks.

But before you do, you may want to spend some time thinking about what you’re investing for. Naming your goals will help guide you towards an appropriate investment portfolio. As a bonus, thinking deeply about goals may just help you to find the motivation to stick with them.

Interested in investing, now that you know where to start? Check out SoFi Invest® today.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

SoFi Invest®
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.


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