Steering Your Financial Ship: A Strategy to Align Investments with Financial Goals

Step #3

Financial goals are like destinations on a map, and investments are the vessels that carry you to these destinations. Aligning investments with financial goals ensures you travel at the right speed, face the right level of risk, and ultimately reach the right place. Regular reviews of this alignment are crucial.

The first step in this alignment process is categorizing your investments. For most, these will be divided into retirement accounts such as 401k, IRAs, and taxable investment accounts. It's important to list these and document the assets in each account. Understanding where your money is provides a basis for alignment and helps you identify any gaps or redundancies.

Take the case of Warren Buffett. One of the world's most successful investors, Buffett knows the importance of maintaining a keen awareness of where his money is and what it's doing. His investment company, Berkshire Hathaway, keeps detailed records of all its holdings and regularly reviews and adjusts them based on their performance and the company's long-term goals.

Once you know where your money is, you can begin aligning your investments with your goals. Different goals require different investment strategies. Short-term goals, which are typically less than three years away, should be matched with stable, lower-risk investments such as money market funds or certificates of deposit. These investments are less likely to lose value, making them suitable for goals that you need to meet in the near future.

For medium-term goals, those between three and ten years away, you might consider moderate growth investments like balanced funds or certain types of bonds. These investments carry more risk than short-term investments but offer higher potential returns.

Long-term goals, which are more than ten years away, allow for higher-risk, higher-growth investments like stocks or stock mutual funds. Over long periods, these investments have historically provided higher returns than less risky investments, making them suitable for goals that are far in the future.

As you age, it's important to adjust your asset allocation. The conventional wisdom is to hold a higher percentage of bonds and cash as you get closer to retirement, and a higher percentage of stocks when you're younger. This is because bonds and cash are less volatile than stocks, reducing the risk of large losses as you near the time you'll need to start withdrawing from your investments.

Rebalancing your portfolio periodically is also key to maintaining your target allocations. This involves selling investments that have grown to represent too large a percentage of your portfolio and buying those that now represent too small a percentage.

The practice of regularly reassessing investments is well illustrated by the approach of David Swensen, the legendary manager of Yale University's endowment. Swensen was known for his meticulous and frequent reviews of the endowment's holdings, enabling him to adjust and realign the portfolio with the institution's financial goals as needed.

Performance evaluation is another crucial step in aligning your investments with your financial goals. This involves reviewing your quarterly statements and assessing whether your returns are adequate for your goals. If your investments are underperforming, you may need to adjust them.

Regular revisitation of your investment selections is also essential. This should be done at least quarterly. If you notice that your portfolio is no longer aligned with your goals or your age, rebalance it. Additionally, ensure that you update the beneficiaries on your accounts as needed.

So, what should we take away from this discussion? First, your investments should be matched to your specific goal timelines. This ensures that you're taking on the appropriate amount of risk for each goal and increases the likelihood that you'll reach your goals. Second, your asset allocations should be adjusted to balance risk as you age. As you get closer to retirement, shifting towards less risky investments can protect you from large losses. Lastly, monitor the performance of your investments regularly and make changes to stay on course.

Aligning your investments with your financial goals is like steering a ship. It requires constant vigilance, periodic adjustments, and an understanding of where you're trying to go. It might seem daunting, but the journey is well worth it. With careful planning and regular reviews, you can ensure your investments are taking you where you want to go.