In this blog, I would like to share the reasons why most people fail to accomplish their long-term financial goals and what you should be doing to ensure that this does not happen to you.
What does a long term financial goal mean?
This is not a trick question. In my view, any goal that is at least 10 years from now can be classified as a long term goal. The obvious examples are planning for Retirement, meeting expenses related to children’s education or wedding, building a home, repaying off debt or any other financial goal that’s at least 10 years away!
Why is it that you may fail to accomplish your long term financial goals?
There are several reasons that can hurt your ability to meet your long term financial goals. The primary ones are as follows:
(1) Inability to accurately quantify your financial goals.
(2) Market Factors: Inflation, Market volatility and Taxation
(3) Withdrawing the money for some other emergency along the way.
(4) Failing to start early.
Let’s discuss each one of them and find solutions that will ensure that this does not happen to you.
(1) Inability to accurately quantify your financial goal:
The biggest mistake investors make while investing for the long term is their inability to quantify their financial goal. There are two questions that you need to ask yourself. How much would I need? When? Since the goal is far away, you make assumptions and these may not hold true. For example, if you are planning for your child’s education, you do not know anything about the likely career that your child would like to pursue and how much would it cost? Imagine your child wants to be a cricketer and you start by planning for their college education! Your expenses do not start after 15 years (like it does for college education), it starts right now! In this case, your long term goal could turn out to be a short to medium term goal and the expenses arrive much earlier than what you had planned for.
So, what is the solution? First, devote some serious time thinking about your goal. For example, if you are planning for your Retirement, think about the lifestyle you would like to lead and do a detailed calculation of what it would take to live such a lifestyle. All these would be assumptions to begin with but over time as you start getting some more clarity, it will be easier for you to adjust. Second, plan for a little higher amount (let us say 20% higher than what you may need).
(2)Market Factors: Inflation, Market volatility and Taxation
All these factors are beyond your control. You have to make assumptions and these assumptions may not come true. How should you address these issues? There are two crucial ways that you would need to adopt to address these issues. First, be conservative while making your plans. If you believe inflation is likely to be 4% p.a., plan for 5% p.a. Similarly, if you believe equities can potentially deliver 12% p.a. then plan with a much lower expectation (say 10% p.a.)Â
As you do this, you may realise that you are unable to meet your financial goals. Well, it is good to know this upfront than to get surprised later. Nonetheless, you should start even if it is in a modest way and my biggest learning has been that as you start seeing some success with your plans, you find ways that ensure that your plans are eventually met. You should always be flexible in your thought process and approach to investing as it is our rigidity which often hurts us the most, especially since the environment in which we operate is so dynamic! Sticking to your investment biases has been proven to be the biggest reason for underperformance of your investment portfolios.
(3) Withdrawing the money for some other emergency along the way
This is a big reason for failing to meet your long term financial goals. Generally, savings and investment decisions are initiated in good times. But we all know life is not a bunch of roses and when the bad times come, you have no choice but to withdraw from your long term savings.
So, how do you address this issue? You can address this issue in three different ways. The first one is the softer option of just tagging your investment for a particular need. As a result, you will morally feel obligated not to touch these investments as you have a bigger purpose in mind. The second option is the hard option. Invest part of your investments for your long term goals in financial instruments that do not provide liquidity. This may be very contrary to what a good investment should be but it works extremely well on a behavioural front. If you have to pay a penalty to withdraw or you just cannot withdraw, you will force yourself to look for other options. Third, you invest in solution oriented products. For example when you invest in the National Pension Scheme (NPS) or a Deferred Annuity from an insurance company, you have a clear outcome defined when you make your investments… pension for a lifetime!
(4) Failing to start early
Once you have defined your financial goals, you can tag your current investments to meet these goals. In other words, you are checking for the adequacy of your current investments to meet your financial goals. When you do so, you may have a surplus (very rarely does this happen) or a deficit. In case of a deficit, you need to define the savings required to meet your financial goals.
Many of us do not give adequate time to build the necessary funds for the long term. We keep delaying our investment decisions and often reach a point where it is too late to start.
Start early! Save Regularly! Build a diversified portfolio! That’s the mantra for a successful long term investor.
Conclusion
To sum it up, quantify your goals, build a savings habit, start early and always be flexible in your approach. You certainly do not want to be the one who is struggling to meet your financial goals!
