Having a goal is critical to your investing career. Goal gives you directions. It will also set your mind to reach that goal. So, before putting any money into stocks, the first question you should ask is what do you want to achieve with stock investing?
For most investors, the goal is not to be charitable. Charitable has its place and time. They want to earn return on their investment. So, how much money do you want to have at retirement age? Let's assume that we all want to retire by the time we are 65. How many more years before retirement age? Twenty? Twenty five? How much savings do you have right now? All these factors will change your investment strategy.
Let's consider several scenarios. The first scenario is a 40 year old investor. He has nothing in his portfolio and his goal is to have $ 1 Million by the time he retires. As of right now, he can invest about $ 300 per month. That is a good goal but is it achievable? Well, let's see. If he can match the stock index return of 10.5% annually, his nest egg would have grown to $ 381,787 by the time he is 65. Obviously, he fall short of his goal. If he can't save more than $ 300 a month, the only way he is going to get $ 1 Million is to have his investment grow by 17% year in and year out.
For this gentleman, his goal is to achieve 17% return on investment. Obviously, investing in index fund will not suffice because historically, index fund will only give you a return of 10.5%. Having this goal makes him more focused in his investing career. Instead of thinking that he can reach $ 1 Million by investing in index fund, he now has to find other ways to boost his investment return to 17% annually.
The second scenario is a 40 year old investor who had amassed $ 100,000 in savings that he had accumulated since his working days. His goal is to have a $ 1 Million by the time he retires too. He would have an easier time than a second gentleman. Our calculation shows that he can reach that goal without even having to add a penny more to his savings. Furthermore, his investment does not have to earn 17% annually. He can still reach his goal by investing in index fund which historically has returned 10.5%.
There is nothing wrong with having an investment goal. Goal helps you to focus. While having a goal will not automatically boost your investment return, investors with a goal will find a way to boost their investment return. Finally, investors should set a realistic goal too. Expecting a 50 % annual return on your investment might not be achievable if you just start investing or if your past return had been less than 10%.
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