The following is excerpted with permission of the publisher John Wiley & Sons, Inc.(www.wiley.com) from Risk Less and Prosper: Your Guide to Safer Investing
Step 4: Assign a Timeline
Step 4 should be a very quick stride to take. Tie your goals to deadlines. If you can’t name a specific date, or if it makes no sense to do so, choose a range instead. Without tying down a timeline, you have nothing but a wish-list, blowing in the wind. From a psychological standpoint, too, deadlines add the crucial element of motivation.
Compare Julia and Sue’s education investment plans. Julia acknowledges that she plans to invest for her children’s education. “For me, educating my children is a big reason for investing today,” she says. She leaves it at that, open-ended, although she surely knows her children’s ages and expected times of graduation from high school.
Sue, on the other hand, shares Julia’s goals but she’s already focusing on specific dates. Listen to the way a deadline concentrates the mind and brings a goal closer to fruition. “Now that my oldest son has started college, I have become newly aware that it will only be ten years before my youngest is ready for college,” Sue says. “Three years before she starts, my son will graduate from high school. If they both go to college, as I expect, then we’ll have one year when we need to help out with two different tuition bills. And we have tuition bills to help out with right now--and for the next four years--for my oldest. So we are keeping our eyes on the next four years, as well as on the period that’s seven to fourteen years away.”
Julia and Sue have children who are in elementary school. As long as Julia’s thinking floats timelessly off-calendar, it will remain vague. By contrast, Sue has been forced to attention by having an older child in college. She has set two separate time frames. The second is far in the future, surrounded with uncertainty, but it has become much more vivid in her mind. As a result, Sue is poised for action but Julia is not.
Step 5: Consult with Key Partners
Your goals are the mainspring of your investment plan. So, unless you lead a solitary existence, it’s worth consulting with the key partners in your life to reach consensus about the financial goals you share.
Often, goals don’t get formulated well because they conceal unexpressed conflicts. One spouse may want to retire early, but the other may have entirely different intentions. One may wish to travel during retirement, the other simply to be near family. One may wish to fund a child’s entire education costs, but the other may insist on having the child assume more responsibility.
Difficult subjects don’t end there. Discussions about relocating to a new city or caring for elderly parents can be especially prickly. Other family members’ opinions may bear considerable weight depending on the situation.
This is not the stuff of finance, but it’s a matter that you can’t afford to overlook. If you take this target practice together with important partners in your life, you may get halfway to consensus and beyond.
Step 6: Tally Costs
The next step is a critical one--attaching a price tag to your goals. Money talks. Completing this exercise can finally catapult your dreams into planning terrain.
This can be a challenging research project, but you don’t have to let it spin out of control. There are plenty of efficient shortcuts. Check out the abbreviated “cheat-sheet” we’ve added to help you complete your initial research quickly. Later, you can return and add detail as you require.
One thing you won’t be able to predict is future inflation (or deflation), so let’s be clear: the numbers you are assigning are in today’s dollars. In subsequent chapters, we’ll talk more about how to align “today’s dollars” (or “real” dollars), with the actual (or nominal) costs.
As you conduct your resource analysis, extract the cost of your basic needs as well as your wants. The line between them, in today’s dollars, brings us back to your bright line of defense from risk. It’s the minimum you must be assured of having when the time comes to spend--and, again, it signals how much you need to have in safe investments.
Table 2.3 Resources for Estimating the Costs of Common Goals
- Goal: Buying a home; Information Resources: Home valuation websites; local banks (mortgage rates and requirements); municipal websites (for property tax rolls, which usually include assessments and tax rate information.)
- Goal: Higher Education; Information Resources: Websites of individual colleges and universities; family conversations about what level of funding you plan to provide; IRS Publication 970 (“Tax Benefits for Education”)
- Goal: Retirement; Information Resources: Use your current consumption as a benchmark; your most recent income tax return; website of the Social Security Administration; website of AARP
Now that you’ve reached the end of this targeting exercise, you’re ready to consolidate your results. On one sheet of paper, list your goals, the resources they will require, their priority, and estimated timing. The six-step exercise toward “IMPACT” can help keep longer-term goals in focus alongside more imminent ones. It also allows you to visualize--and eliminate--potential conflicts among your goals. For instance, too many short-term goals with too high a price-tag may not be feasible. Seeing them side-by-side in your list might set you rethinking your priorities and timing to better effect.
Hold on to your outline. It’s not just a baseline for you to return to in future years. It’s a travel guide to keep your destinations in clear and constant view.
Defining Success
Establishing financial goals is a necessary starting point for all personal investors. But in the goal-based investing approach that we’re advocating, your goals not only set the table--they determine the menu. And they also provide the best rating criterion imaginable.
With all the noise in the marketplace about performance, it’s easy to get distracted from this fundamental fact. The standard of success is not a comparison with a market index or composite. These work well for evaluating professional money managers. But they fluctuate constantly and serve only to weigh your results against various market averages. When it comes to judging your own personal investment performance, it’s your goals that make the most meaningful benchmarks. The proof of the pudding is in the eating. And the definition of success lies in the achieving.
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