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If you ask most people why the invest, their answer will usually be along the lines of; “to get rich”, “to have security when I’m old”, or “because I know that I should”. Whilst all these answers are relatable, they have one thing in common: they lack clarity.

Goal based investing is a style of investing that aims to clarify an individual's purpose for putting their money away. It is the action of creating a portfolio for a specific reason, rather than simply to make the most money out of the market as possible.

What is an investment goal?

“I’m investing for a £20k house deposit in 5 years” is an investment goal; “I’m investing for somewhere to live in the future” is not.

An investment goal must be a specific, targeted objective. There are two specific reasons for this.

Firstly, an investment goal needs to have a clear objective in order to ensure that you can choose the right assets to best achieve it. If you are investing in order to help buy a house, then you will not invest in the same things as you would if you were saving for retirement.

Secondly, by having a clear goal in mind it is easier for you to focus on and make the requisite sacrifices in your daily life and budget in order to achieve it. Aiming for a specific goal is mentally more stimulating than trying to achieve an abstract concept.

How to set an investment goal using the SMART format

If you are struggling to formalise your own goals, then using the well known SMART method is a great place to start.

Originally conceived in the early 1980's as a project management technique, it has now been adopted by many in the financial industry and has been helping investors all over the world make clearer decisions about their investment objectives.

Broken down into five separate categories, the SMART method gives you an instant investment checklist for every objective.

An example of setting a goal with SMART

Going back to our earlier example, let’s now construct a precise investment goal using the SMART method, and see how it works in practice when designing and achieving an investment goal.

GOAL - £20,000 house deposit within 5 years.

SPECIFIC: The details and outcomes of this goal are clearly defined ✅

MEASURABLE: Progress can be clearly measured by the amount of money being set aside ✅

ACHIEVABLE: You can research assets that will give you the growth you need to reach your target within your time frame, such as short to mid term investments (like 5-year bonds)  ✅

REALISTIC: You can ascertain how realistic it is for you to achieve by gathering information on your income, the average cost of housing in your area, and your level of risk tolerance ✅

TIMED: The five year deadline gives this goal a clear time frame in which it must be completed ✅

Using the SMART method to set each investment goal will not only save you time and effort in the long run, but will also streamline your investment planning and force you to clarify exactly what it is you are investing for.

Your capital is at risk, and past performance may not be a reliable indicator of future results. Oval Money is not permitted to provide financial advice, and if you have any questions please consult an expert.

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