Podcast 20th November 2015
Investment Advisors, Financial Planners and Personal Finance columns in the media tell you to set financial goals in order for you to get into the habit of saving. For example, children’s education, purchase of property, retirement and even holidays, all require financial goal setting. Once you set your financial goals, you then save to achieve the financial goals. In a normal, perfect world, financial goal settings can work, as there is a smooth road to the goal post.
Financial goal setting is not new in India. It’s been operational informally through chit funds and other non organized and non regulated schemes where you save a certain sum of money every month to buy gold or other products. Women have Kitty groups where they pool in a sum of money and everyone in the Kitty gets the full sum. Kitty is seen as both a financial saving for women as well as a social get together.
Financial goals set over a longer period of time require more detailed investments. The thumb rule is allocating savings between various asset classes to generate a certain return over a period of time. For example a mix of equity, fixed income and gold will generate a certain return that will enable you to achieve your financial goals. This asset mix is based on returns provided by each asset class in the past and interpolates that into the future.
The caveat here is the future returns are predicted by the returns generated in the past. Now the standard disclaimer in all financial products is that past returns are not indicative of future returns and yet the mantra for achieving financial goals is to invest in assets that will provide a certain expected future return based on past returns.
Financial goals also assume that you are on an assured career path or if you are an entrepreneur you will have steadily growing cash flows. In this fast changing world both assumptions do not hold true. There are too many disruptions in economic and business cycles that make sure there is no smooth sailing for anyone, however talented they may be.
Given the disruptions in the marketplace, assuming returns on investments also becomes a pin the tail to the Donkey game. Hence setting financial goals and saving for the goals can prove disastrous when disruptions happen.
So how does one save for meeting future wants and needs? The ideal way is to make sure that financial goals and investments to meet the goals are in sync with the economic and business environment. For example at peaks of equity market bubbles both goals and expected return on investments become unrealistic leading to prolonged pain when the bubble bursts. If you are working in a fast growth company, your goals can be achieved much faster than if you are working in a slow and steady growth company. In the case of the latter, investments in fast growth stocks would give the necessary indirect exposure to fast growth sectors.
Set financial goals but be smart about it.
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