Investing Like a Pro
Using Psychology to Make Smarter Financial Decisions
Investing can be a daunting task due to the numerous options, risks, and uncertainties involved, making it difficult to make rational decisions.
It can be challenging to stick to the discipline required while investing, leading many investors to veer off.
While there is plenty of advice regarding the approach, discipline, and math necessary when looking at investments, not enough attention is paid to the motivational role of one's goal while investing.
Having a goal while investing makes the process more manageable to execute.
A clear vision of what an individual wants to achieve with their money, such as buying a house, retiring early, or traveling the world, can motivate them to save and invest consistently, avoiding unnecessary spending.
Why is having a goal important?
Different goals require different time horizons, risk levels, and asset allocations, and having a goal helps in choosing the right investment strategy
The amount one invests, the pace of investing and the asset class will depend on when the funds are needed and for what purpose.
For example, if your goal is to buy a house in five years, then where you invest will be different from, say, if your goal is to retire early in 20 years,
Having a goal can help you cope with market fluctuations and emotions. Investing can be stressful and emotional, especially when the market goes up and down unpredictably.
However, if you have a goal, you can focus on the long-term outcome rather than the short-term noise.
You can also remind yourself of why you are investing and how far you have come.
Having a goal while investing ensures that the funds are used productively and not spent on a whim.
Purpose defines the asset allocation
Asset allocation is not a one-size-fits-all approach, and it should be customized based on each individual's investment goals, risk tolerance, and financial situation.
The purpose for which the funds will be utilized on maturity makes it easier to decide on which asset class one should invest in.
An individual's investment goals can define their asset allocation by helping them determine their risk tolerance, which is the degree of uncertainty they are willing to take on with their investments.
Higher-risk investments may be appropriate for individuals with long-term investment goals, such as saving for retirement, while lower-risk investments may be suitable for short-term goals, such as saving for a down payment on a house.
If you want to buy a house in five years, you might want to invest in a low-risk portfolio of bonds and cash.
If your goal is to retire 20 years from now, you might want to invest in credit-risk debt funds, a higher-risk portfolio of stocks and exchange-traded funds.
Fulfilling Purpose Key To Happiness
Another thing that one must not hesitate to do is spend the money set aside for a purpose.
Investing for goals means that when it is time to use the funds, one is not tempted by the returns of their investments and looks to reinvest or begin to question whether fulfilling the goal is essential.
Yes, one should re-evaluate goals in the context of prevailing circumstances but don’t forget that these funds are the fruits of years of deferred gratification.
Go enjoy now!
If you have been saving up for a vacation and accumulated that corpus, use the funds!
Being an investor is already one step forward, defining a purpose can help you stay the course and be successful.
When you fulfill your purpose you will also be a happy investor.
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