3-08 Set Goals and Targets

You should have a “game plan” for your investing life. Just as you plan your workday, vacation, college financing, golf matches, and other areas of your personal and professional life, you need a plan, objective, and goal for your investment activities.

Spend some quality time with yourself, thinking about what you really want to accomplish. Stating that you simply want to make money or become wealthy is not helpful. There is no specific target or goal. Without a target, you’re a walking example of Yogi Berra’s great quote: “We’re totally lost, but we’re making good time.”

Create a game plan and target showing where you want your portfolio to be as compared to your desired objective. If you want income, decide how much income and in what time periods you’d like to receive it. Looking for appreciation? Decide what appreciation and growth percentage you’d like. The goal and target you select is less important than the requirement of having a comparison mechanism. This gives you a working “scorecard” of your performance. You can change, ratchet up or down your comparison target as often as you wish. Just be sure to have something to measure your performance.

Choosing Your Goals

All of this is well and good, but how do you choose your goals?

Choosing your goals is effectively the same as choosing your risk and reward tolerance. For example, consider these scenarios:

Putting Your Money To Work

You just saved up $1000 for your first emergency fund. But you do not like the idea of cash sitting idle in a savings account – you want to put it to work. In this case, you have a very low tolerance for risk, and you need liquidity so you can access this money if something goes wrong. In this case, you might consider investing in money market funds or stable utility stocks that have very little price movement, but pay out a regular dividend.

Preparing For A Major Life Change

Now you have a stable job and your emergency fund is take care of – and you are saving up for a down payment on your first home. Now you are willing to take on some risk. After all, losing your investment only means you have to keep renting a bit longer. In this case, you would focus on growth stocks or industry ETFs, and aim to get a better return than the market as a whole to accelerate how fast you can buy a home.

Retirement Account

If your retirement is still a long way away, you want to make sure you’ve got as much money as possible. While maybe you don’t want to take as much risk as when you’re trying to grow your down payment money, a reasonable goal is to at least match the growth of the market, balancing your risk and rewards for the long term.

If retirement is looking a lot closer, then you will be less willing to take risk – instead trying to generate some extra money. In this case, “beating the market” is not as much of a concern, but instead being able to generate a consistent 5% annual dividend or growth to ensure a steady stream of retirement income is a more reasonable goal.

Comparing Your Portfolio to Benchmarks

So, you’ve bought several stocks that you have spent hours researching and one month later, you have gained 2 percent. You’re a hotshot investor, right? Maybe, maybe not.

How well did the overall stock market perform during that time frame? Because if the overall market gained 5% in that same month, then you’re really wasting your time. Instead, you could have bought an ETF that mimics the overall stock market like and made more money with less effort.

On the other hand, if the overall market fell by five percent over that period, then you are quite a savvy investor (at least over that short time frame). Many professional traders are not able to beat the market over 1 year, let alone 5 or 15 years.

Let’s look at some common stock market benchmarks:

The S&P 500 index takes the prices for the 500 largest companies in America and averages them into a single number so that is easy to see the overall direction of the stock market. It is generally the most used index for benchmarking stock portfolios. You can buy an ETF that mimics the S&P 500 – its ticker symbol is SPY.

The Dow Jones Industrial Average is an older index that focuses just on 30 key stocks from different areas of the economy. The most popular ETF tracking the DJIA is DIA.

There are also benchmarks for stocks traded in other countries like the TSX index (Canada), the Nikkei (Japan), the DAXX (Germany) and virtually every country in the world that has a stock market.