Investing without Goals Is Like Golfing without a Putter…

… you might make some general progress, but when you finally come close to the target, it will be very difficult for you to hit that shot.

Time and time again, people write to me and ask questions about how they should be investing their money. “I have $5,000 in savings – how should I invest it?” My response is always the same: “What’s your goal?”

Obviously, there’s no guide in the world that will tell you the perfect investment for what you intend to do, nor is there an easy tool that will help you spell out what your goal is. Over the last few years, though, I’ve learned enough about the basics of investing to recognize that there are a few simple rules of thumb that can help guide you to a rough idea of your goal – and a rough idea of how to get there.

First thing – envision the life you want in five years. Do the same for ten years and twenty years down the road. Flesh out each of these visions with as much detail as you can. What do you hope to accomplish? Are you married? Do you have children? What sort of job do you have? What sort of home do you have?

There is no right or wrong answer. The only answer that matters is what you want.

Once you’ve started fleshing out those pictures of the future, you’ll find that a few elements really excite you. Maybe it’s the job you want. Maybe it’s getting married. It might be children, or it might be a house. Maybe it’s the business or career you’ve launched.

Whatever those key things are that really get your motor running are the very things that you should set as your goals. Plus, since you’re envisioning time frames to begin with, you also have a good sense of roughly how long it should take to get there.

Now, how should you invest for that goal?

If the goal is five years or less down the road, stick with something low risk, like CDs or cash or bonds. Over this short of a timeframe, putting money in market-driven assets like stocks and real estate is basically gambling.

If the goal is ten years or more down the road, consider putting a large portion of it in some market-based assets, like stocks or real estate (or even gold, if that’s a personal philosophy of yours). Over a longer time, the short-term risks of such investments is reduced without losing the potential gains.

If your goal is in the middle, put most of your money somewhere safe and perhaps dabble a bit in a market-based investment, moving your money out after a few years.

As always, don’t overload your risk tolerance. If the thought of losing 40% of your money in a year – even if the general trend is upward over a long period – makes you sick to your stomach, don’t invest in stocks or other market-based investments. If such things make you nervous, you’re very likely to make an irrational move at the wrong time and lock in a lot of losses – something that would be disastrous for your goals.

What specific investments should you use? I have no specific recommendations, other than keeping your fees as low as possible. I have used Vanguard for many of my investments over the years and I invest in their index funds because they have low costs and usually just match the market, which is all I really want. My cash is mostly in ING Direct.

If you do one thing, do this – think about what your goals are, whether you have money to invest now or not. Knowing where you’re headed makes the journey infinitely easier.

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  1. Mick says:

    Dear Trent,
    I am in a phase of my life in which things are all very misty and unclear. I am unfocused, not driven, and overall disappointed in what my life is today. I’m 32 and I actually know what I would like to have, I seem to have the means to have it, but I just don’t.

    I’d like to have a relationship, but I don’t know how to speak with women. It’s not that they don’t like me…i’m just never their type.

    I’d like to have a car of my own, but my actual income doesn’t let me choose a good used car, ‘d have to settle for something that breaks in a year or two.

    I am self employed (I do architectural services and visualization) but this kind of job is not rewarding where I live.

    I’d like to move out, but somehow it nevere seems to be the right moment or the right time.

    The result of this is a very big depression, a feeling of burn out I can’t get off me. I’m feeling overwhelmed, I don’t know what I can do about it.

  2. Doug says:

    This one just jumped out at me:

    Over a longer time, the short-term risks of such investments is reduced without losing the potential gains.

    Subject/verb: “risks is”?

    Good advice though: it’s difficult to get somewhere if you don’t know where you want to go.

  3. Little House says:

    Thanks for the tips, these are actually very helpful to me right now. For one, I am saving for a house, so have put my money in a high-interest savings account, and two, I’m beginning to think farther down the road and have invested some of my money in stocks. My next move is to open a ROTH IRA but I’m procrastinating on this until I am able to purchase a house next year. Then I will have more money (hopefully) to save towards retirement instead of a down payment!

  4. Shevy says:

    You definitely have to know your own risk tolerance. Mine is very low so all my retirement funds are in GICs (other than my weekly contributions that sit in a daily interest account until there’s a large enough amount to put it into a GIC, usually once a year). I didn’t lose a penny when things went crash. And I can plan in a much more realistic manner how much I will have in 10 to 15 years time (my time frame). This is especially important to me as my husband & I will be retiring at the same time as our youngest child will be entering post-secondary education and/or getting married. I can’t afford to pretend that I have 40% more than I’m really going to have.

  5. wanzman says:

    I think you mean…

    “Investing without goals is like golfing without the flag stick in.”

    In golf, a putter is just a tool, but not a goal. If the flag stick were out, you would obviously not have much an idea where to hit the ball.

    Golfing without a putter would be like investing with a low income or investing with less than steller investing knowledge – not impossible, but it sure makes things difficult.

  6. Kevin says:

    wanzman, Great point; a much better analogy.

  7. Shannon says:

    Wanzman, you hit the nail on the head. I was really confused by Trent’s analogy…

  8. Brent says:

    I’ve got the goal (a new car, big vacation). I know my risk tolerance… big. I can make very large changes in both the size of the goal and the resources allocated to it, I also have a big emergency fund. I have no debt other than a mortgage. I currently have a 2002 with 65K miles on it. Sure my car could die tomorrow, but its not likely. With an indefinite time line and a big risk tolerance would I be better in a stock index fund or in something with a fixed income? Right now the rate on fixed income items just seems too small to justify.

  9. Craig says:

    Yea and no. I started an investment fund for 10 years. I don’t have a specific goal. Could be for a house, engagement ring, business, I don’t know. I just know I want to get the compound interest over the next decade.

  10. Of course, you are right. we need our goals set first.

  11. triLcat says:

    Mick – look at what you wrote. You have clear goals.
    Re-order them.
    Your job needs to be satisfying and reasonably lucrative. How are you going to make that happen?

    Then how are you going to buy a decent car/move out? Savings come into play here.

    Finding a girl when you don’t have a place or a car or a decent salary… well, what kind of girl is going to be interested in a guy who is 32 and is still living with parents and doesn’t have a car and doesn’t have a good job?

    Hate to rain on your parade, but I’m still pretty fresh out of the dating market, and honestly, a guy like you would have been red flags all the way, probably wouldn’t have gotten a first date. Most women want a man who will be able to build a future with them. If, at 32, you’re not much ahead of where you were fresh out of high school, it doesn’t bode well.

  12. Mick says:

    You are right on the spot, but it is also sad.

    Just to make things clear when I said move out I didn’t mean I’m living with my parents: I meant I’d love to live in a different country in which I am now.

    It is sad, though that I am forced to see the connection between relationship/money. A relationship should be much more than have the chance to say: yeah I can afford you.

    just 2 cents on my slumbering mood.

  13. Amateur says:

    @Mick

    I think you’re thinking of it mechanically that you have to be able to afford a woman, women can buy their own way. Plenty of modern women could care less their male partner earns far less than them but are in positions in their lives where their work is fulfilling and all his goals are in line, big and small. The money becomes only an issue if your goals aren’t lined up and nothing has been achieved, then it just stands out glaringly like triLcat says. But she’s right, most women do want someone who is reliable, consistent and able to get things done.

    Also if you want to get serious with any woman, you’ll need to deal with the money issue at some point, her family will want to know all about you. It’s easier you fix this aspect of your life now than dodge it when it comes and feel less of what you are. Saw some of your work on your site, looks like you’ve got yourself a skill, keep grinding, you’ll make it. Good luck, man.

  14. Austin says:

    Staring out my window at the snow and reading your post really made me miss golf.

  15. Andrew Weinberg says:

    Great advice Trent. However, when dealing with intermediate and long term goals, the portion of money that is put into the market, as opposed to safer investments, should be kept there longer. The longer you keep it there, the more you smooth out the volatility and gain from the increased expected return. If you only leave money in market based investments for a couple of years, it is far more risky than leaving that money in for 5 years or more.

    Of course, this is just one strategy, but it’s worth considering.

  16. Dave C says:

    This may be a silly question Trent, not sure…but is there somewhere one could find your overall IPS (investment plan) and asset allocation?

  17. Correction: I meant speculator/speculating when I said trader/trading.

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