Investment goals

Investing and Markets 📈 Portfolio Management ⚖️
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I’m pleased with the performance of my own portfolio but have increasingly felt during the year that I needed to make my goals more concrete. So below is a back of an envelope approach that helped get me started, if you’re struggling to articulate your investment goals, maybe it will help. I’ve kept nice round numbers to avoid too many complicated sums :smiley:

Lets say I want to retire in 20 years.

When I retire I want an income of £50k.

I will get £25k from pensions. So I need to make up the outstanding £25k from additional income.

I invest £10k in each of those 20 years, so I will ultimately invest £200k between now and retiring.

If that investment compounds at 10% (total return, i.e. capital growth + dividends) the £200k will be over £600k by the time I want to retire. Lets assume £600k – over a 20 year time span there’s plenty of opportunity for a couple of major stock market crises so losses are to be expected somewhere.

Maybe I spend £100k, and I’m left with £500k. Moving that into an income based investment that delivered 5% would generate an income of £25k. And when added to the pensions £25k it would achieve my target £50k of income.

So what does this mean for my current investing? Or my portfolio performance for 2019?

If the above was my goal, I need my investments to be hitting that 10% return. Not every year delivering exactly 10%, but on average over the 20 years returning at least 10%. So if I’m not hitting that target, I’m not going to get to my goal, and I need to revise my strategy.

Some other things that I’ve found helpful:

Benchmarking – All of my investments are listed in the UK, so I use a Vanguard FTSE All Share tracker to compare. It’s not perfect as I have some AIM stocks, but it’s the sort of vehicle I would choose if my stock picking goes belly up. Its also an accumulation fund – so all dividends are reinvested – just like the dividends in my portfolio. If I had US stocks, maybe an S&P tracker would be appropriate. With a mix of UK and US, I would use a weighted average of trackers to reflect my portfolio mix. Or maybe I should just pick a global tracker as a lower risk investment to compare to…

If, like me, you are adding (or removing) cash to your portfolio over time, then reading up on unitisation and internal rate of return helped me get a better understanding of how portfolio cashflows affect performance. It will also to give you a sound basis for the above benchmarking…

Happy new year folks.

6 Likes
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Thanks for sharing. I think that writing down your goal or strategy is a really powerful way to remain true to what you are doing and not let emotions drive your decisions.

I don’t really have a goal because investing (with Freetrade) is mainly a hobby, but this is my strategy:

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I like how you’ve joined up your strategy, goals and performance. Given me a few things to think about.

As for benchmarking - since you could choose anything to compare against, you can always find something doing better or worse than your own investments. Does it help?

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I’ve bookmarked your blog Sleepy. Awesome :+1:t3:

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Cheers, glad you enjoyed the waffle.

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Thanks. I would say that the bit missing from the above example is the strategy - the approach that I would take to achieve the goal. I just think it’s useful to start at the end and work backwards - goal > strategy > investments, rather than picking some stocks because they look pretty (which I used to do).

As for benchmarking, I think it does help in certain respects. You might think of it as “opportunity cost”, in that you may find you could have done better investing elsewhere, I think this is a less helpful approach. For me the more important point is risk vs. reward. If I can get the same returns and be exposed to less risk then I’m making the wrong choices. If you can’t beat the market - just buy the market.