If you have recently decided to make your money grow and take greater control of your financial destiny, congratulations. Having opened your investment app account, and perhaps spent some weeks practising paper trading, you may be surprised by what the next logical step actually is.

It is time to decide what your investment goal really amounts to, and formulate it as precisely as possible.

However, “make money” is not a rational goal, no matter how you phrase it. Your objective should be to invest in a way that matches your circumstances.

You see, people invest for different reasons. They start investing at different times in their lives, and their different personalities are each suited to certain types of investments. All these factors should be considered if you want to give yourself the best chance at meaningful investing success. 

Once you start thinking about it, this becomes a pretty expansive question. Therefore, we’ve boiled the “before investing” goal-setting checklist down to three questions. They may seem trivial; they are not. In fact, the answers will largely dictate the shape of your investment strategy.

1. What is your investment horizon?

Time and money are always inseparable concepts. Now is the time to decide, or at least estimate:

A) How much of your income will you invest? AND 

B) How long will you keep working and earning?

The answers to these questions don’t need to be set in stone. You don’t need to know the exact date of retirement or the precise amount of cash you will be depositing into your investment account each and every month. An approximate number of years and your best guess at the amount of funds you will be contributing to your portfolio’s growth is enough.

The idea here is to define your investing time horizon. From there, you can figure out where you fall within your investment lifecycle. This crucial concept can easily get lost among the more commonly used financial jargon.

What to know about the investing lifecycle

The idea is that, when you are investing near the start of your working life, you will have more opportunities to recover from any setback. Therefore, you can take more risk and you will choose a riskier asset mix. When someone closer to retirement looks at their plans and portfolio, it’s in their interest to take less risk and choose a safer, less volatile set of securities. 

This typically means that portfolios are heavily concentrated in stocks at the beginning of a working life. As retirement nears, bonds (which hold their value very well) become more sensible.

Source: Pintererst.com / MarketExpress

2. What will you do with your profits?

Of course, we all need money for food and shelter, but what are your specific plans for the money you earn from investing? What we are talking about here is your financial goals and making plans about how investing can help you reach them.

One of the first principles of investing is to never invest money that you might need for essential goods and services. It’s widely recommended, for instance, that you pay off all high-interest debt and build up an emergency fund before beginning to invest. 

We can therefore assume that your investment returns aren’t going towards everyday essentials – but you may still be planning to put them towards something important, like a car or school fees. Alternatively, the money you earn might be intended for broader, non-specific goals like financial independence or a comfortable retirement.

We can divide the purposes for investing into three categories:

Big purchases 

When a capital-intensive purchase is one of your financial goals, the best approach is to use investing as a way to reduce the time you need to wait to buy what you desire, but without taking any big risks that might mean the purchase actually gets delayed. Typical examples include a car, house, college tuition, or perhaps a boat.

The safest choices in this case would be a savings or money market account, while stable investments with some extra risk include government or corporate bonds. As long as the entity issuing the bond stays in business, you will receive your principal (the amount you invested) back. The rule of thumb is that the higher the coupon (interest payment) you receive on your bond, the greater the risk that the entity issuing the bond will default and you lose your investment. Stock market investments are generally not an advisable way to help save up for big purchases because your principal is at risk.

Financial independence 

Financial independence (or financial freedom) is reached you are not wholly reliant on a job for financial stability because you have become wealthy enough and/or have other sources of income. When looking for financial independence through the stock market, a two-pronged approach is usually followed:

1. Capital appreciation = increasing wealth by buying growing assets
2. Income = receiving regular payments from your investments

Any investment that gains in value will add to your capital and therefore grow your wealth. The two traditional sources of income when “income investing” are coupon payments on bonds and dividend payments on stocks. Newer, less proven income-earning investments include things like staking cryptocurrencies. 

Retirement 

Saving for your retirement means deferring the benefits of having money available now in order to enjoy a greater sum once you stop working. Long-term investing has historically been shown to provide a greater risk-adjusted return, meaning that you should have more for your retirement. The generally understood approach to long-term investing is through a diversified portfolio. That means investing in different types of stocks, bonds and if you like, other assets like cryptocurrencies or precious metals.

Once you have identified all your financial goals, you need to allocate some money to each objective. We can call this financial goal prioritisation. The more you allocate to any one goal, the quicker you are likely to reach that goal relative to the others.

3. What is your investor personality?

A lot of your understanding about what kind of investor you are will simply arise from your investing experiences. This means your approach might well change over the years. Still, taking some time to think about your risk tolerance before you start investing is beneficial. Are you the kind of person who will be pulling your hair out if your investment falls in value by 20%, or would you remain cool as a cucumber if your portfolio were down 50%?

This is not the time to be aspirational; be realistic about what you expect and what you’re willing to tolerate. When it comes to investing, giving yourself the possibility of bigger returns entails being prepared to weather bigger drawdowns to get there. If you are only willing to accept small losses, your potential gains are also limited.

Source: BMO.com

We can define two types of people in markets – investors and traders. In fact, many people like to try their hand at both investing and trading. One approach is to divide your available funds into two camps:

1. Long-term portfolio – This is where most of your money should go and what will likely contribute most to your financial goals, such as a comfortable retirement.
2. Speculative capital – When speculating, you have to be prepared to lose your entire investment. This enables high-risk approaches that, if they work, can add to your wealth significantly and help you reach financial independence earlier.

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While all investors’ goals are roughly parallel – make money instead of losing it – there are a million ways to actually go about it. Copying someone else’s strategy makes little sense: start from first principles, namely who you are, what you want out of life, and how far along you are in your investment career.