The importance of labelling the purpose of your investments

I wish I had a dollar for every time I have been casually asked “what would you recommend as an investment right now?”.  It’s easy to see why someone might think I would be a good person to ask.

After all, on a daily basis as a Financial Adviser, I talk to consumers about financial matters, analyse financial products and produce financial plans that marry the two to achieve a superior outcome.

But in reality, a Financial Adviser might be the worst person to ‘casually’ ask such a question. The reason for this statement is that we are required to build financial plans for our clients with great depth - from the ground up – with purpose.

When we meet new clients, quite often they are overwhelmed, despite the fact that they have quite a strong financial position.  They may be successful and earn a great income but they have applied a simple “accumulation mindset” to their assets, shovelling more and more into a big pile.

They are overwhelmed because at the same time as they are accumulating their assets, they have an equally big pile of life demands and obligations.   These demands drive them to work and shovel even harder and in the worst cases, they feel like they don’t have adequate control of either pile.

What if you designed each of these elements to work together, so that the assets worked to deliver on the life demands and obligations?  Not only is that a better way to live, it’s a more focused way to invest.

A Life Well Lived

Ideally we start with the Life Vision you have planned for yourself.  Ultimately what do you desire from life? What are your personal Values? When we talk to people about a “Life Well Lived” there are several key elements present.

Whilst we all may have a slightly different version, I have met hundreds of clients and three consistent values shine through:

Health,

Family, and

Financial Security, in that order.

Whilst people have many more things that they wish to achieve in life, these three values are non-negotiable – that is, if any of the three are negatively impacted, you are in a life crisis.

Other common elements to a life well lived include:

-          Meaningful Work

-          Giving Back to Society

-          Pursuing Passions

-          Leaving a legacy

-          Connection with others

Financial Security

You can see that the list of values above are far away from being from flippant.  They go to the heart of who you are and what you want to achieve.  So how does this play into Financial Security and Investing?

I have strong belief that once we become financially secure, our finances can then provide the necessary fuel for the other important areas of your life. 

When measuring financial security, we look at specific 6 areas:

Cashflow, Debt Management, Retirement Structures, Risk Management, Estate Planning and of course, Investments.

We believe that if you have solid foundations in each of these areas and that these

are closely aligned to your goals, your plans will be on the right trajectory.

Once you are clear on your holistic plan to achieve financial security, it becomes far easier to choose the investments that align to these objectives.  The make up of those investments should be tailored specifically to your needs.

Investments with a Purpose

When looking at the appropriate investments for any client, two aspects become vitally important.

1.       You own attitude to Investment Risk

2.       The time horizon of the investment purpose

The way these two elements interact is really interesting.  Even the biggest risk taker would be foolish invest aggressively if the funds were required for use in short amount of time.  On the flip side, the ultra-conservative investor could afford to take more risk if they knew the funds weren’t needed for a longer period.  

Then surely the ultimate objective is to have a combination of investments that are aligned to their specific purpose, designed to deliver the appropriate amount of funds at just the right time.

When discussing any specific investment with a client, I really like to see a “label” applied to the investment vehicle itself. What is its purpose?  Once we know the purpose, its time horizon becomes very clear.   The trade off between risk and return becomes even clearer. 

For example, here is a list a few common investment goals:

-          Home Deposit

-          Home Renovation Fund

-          Big Holiday Fund

-          Kid’s Education

-          Holiday Home

-          Kids Investment

-          Future Fund (Retirement years)

I have listed these in time horizon order. 

Lets look at an example of a young family. 

-          They purchased a home but are saving to undertake a renovation in 2 years.

-          A home upgrade is planned in 8-10 years.

-          They also want to provide their young kids who are 2 & 4 with a private secondary school education.  This will commence in 9 years.

-          There is also a strong desire to provide their kids with a lump sum when they are finally mature. As well as some cash gifts from grandparents etc they want to contribute a small amount each week to this goal.

Without creating a purposeful investment plan, they may be tempted to tackle situation ‘one goal at a time’. 

However, there are 4 clear goals, with different time horizons, allowing a different approach to each investment pot.

1.       The home renovation is likely to be suited to bank savings or term deposit.

2.       Once the renovation goals is complete, the surplus funds could be directed into a Managed Fund to save for the home upgrade.

3.       Starting an Education Bond with a quantified commitment each month will ensure that sufficient funds are available when needed.

4.       Commencing an Investment Bond, initially owned by the parents allows for ownership to transfer at their discretion to the beneficiary (the children) at a time of their choosing. 

The family would be provided with a monthly formula – contributing the appropriate amount into each pot that grows the pot to the desired size at the desired time.  Ideally, the longer the time frame, the greater the opportunity to gain exposure to high growth investments.

Not only is the family really clear about their plans and their capacity to achieve their goals, this clarity means that they are less likely to make a hasty or ill-timed investment decision. 

And most importantly, lets them enjoy real life whilst quietly building financial momentum in the areas that are important to them.