Do your investment goals stack up?

But that adage has been well and truly stress tested on just about every level over the past few months because of the uncontrollable events stemming from the COVID-19 pandemic.

On an investment portfolio management level particularly, it's been difficult if not impossible to have much control amid the wild daily fluctuations in the values of many financial securities.

And, on a household level, the repercussions arising from lockdown restrictions and widespread business closures are that many families are now experiencing unprecedented financial strain because of a sudden loss of regular employment income, investment income, or both.

Of course, we all still have some elements of life control and maybe the current conditions are an opportunity to reflect on our investments goals to see if they still make sense and are realistic.

Depending on your circumstances, which may have necessitated impromptu investment actions during the crisis – such as the withdrawal of some superannuation funds or the selling of other financial assets – some goal adjustments may be prudent.

Last week, we referred to the Australian Tax Office now requiring SMSF trustees to not only review their investment strategies regularly, but to justify them.

The same sort of investment review also makes sense outside of the superannuation sphere.

Revisit your investment framework

Regardless of where and how you invest, creating clear financial goals is one of the fundamental pillars for having the best chance of achieving investment success.

Your goals should be well defined and as realistic as possible based on your current financial situation. If circumstances change, it makes sense to review them.

A review needs to take into account your immediate financial needs, and how they may impact your longer-term financial objectives.

Any adjustments will need to take into account factors such as your age, how your household income-earning capacity is likely to change over the short and medium term, and cater for revised expectations on investment returns over the longer-term.

Ideally, investment goals should always have a long-term focus and be designed to endure through changing financial environments over time, including periodic downturns in equity and property markets.

They should also take into account the potential for loss of income over time, which can be partially mitigated through appropriate personal insurance coverage.

Allowing for market risks

The current events have highlighted that investment risks are ever-present, and that when major value corrections do occur on markets they are usually widely unexpected.

In setting investment goals, it's important both to understand that risk is a key factor in investment returns and to build in your own tolerance for risk.

Market risks and potential returns are generally related, in the desire for higher returns will invariably require taking on greater exposure to market risk.

A current example of this is in the fixed interest market, where investors with a higher-risk tolerance have invested into bond issues from companies with low-quality credit ratings (see Know your bonds, they're not all the same). The investment temptation has been the issuers' high income payments, however recent events have seen a large number of these companies default on their debt repayments.

Other key aspects in setting and reviewing goals is your investment time horizon, liquidity requirements, tax obligations, legal issues, or unique factors such as a desire to avoid certain investments entirely. Constraints can change over time, and should be closely monitored.

The danger of lacking a plan

Without an investment plan, it can be easy to lose sight of the bigger picture and to end up with a portfolio that's not well balanced across different asset classes.

As a result your portfolio may wind up being concentrated in a certain market sector (see Over-concentration risk comes to the fore), or it may have so many holdings that oversight of your portfolio becomes onerous.

Most often, investors are led into such situations by common, avoidable mistakes such as performance-chasing, market-timing, or reacting to market "noise."

Many investors—both individuals and institutions—are moved to action by the performance of the broad equity market, increasing equities exposure during bull markets and reducing it during bear markets. Such "buy high, sell low" behaviour is evident in managed fund cash flows that mirror what appears to be an emotional response—fear or greed—rather than a rational one.

Stay focused on your goals

A sound investment plan can help you to avoid such behaviour, because it demonstrates the purpose and value of asset allocation, diversification, and rebalancing. It also helps you to stay focused on your intended contribution and spending rates.

Vanguard believes investors should employ their time and effort up front, on the plan, rather than in ongoing evaluation of each new idea that hits the headlines. This simple step can pay off tremendously in helping you stay on the path toward your financial goals.

Being realistic is essential to this process. You need to recognise your constraints and understand the level of risk you are able to accept.

In reviewing your investment goals, don't underestimate the importance of professional financial advice (find out about Quality financial advice in our Plain Talk library).

A financial adviser can help in developing a framework around your long-term goals and financial capabilities, which can be reviewed regularly over time.

Tony Kaye
Personal Finance Writer
12 May 2020
vanguardinvestments.com.au