From seeking and finding meaningful financial goals
And the appropriate strategy
Again and again I read statements on getquin like "My goal is to read 50 books about finance this year and then finally start investing", "My strategy is to invest 300 euros every month" or "I have set myself the goal to increase the value of my portfolio to 20,000 euros by the end of the year - buy & hold!". Don't get me wrong, I think it's mega that you're all here, dealing with your finances and sharing your ideas and views with the community. And it's also much better to invest 300 euros every month - simply because you can - than to invest nothing at all. But there's so much more ... And that's what I'm going into today!
Step 1: Make clear what you want
@InvestmentPapa always rings in my ears when I think about this topic, which used to be "Hobbies - soccer, skiing and reading. Investing? Necessary evil with no chance of alternative." wrote. And he's damn right about that. Investment is not a hobby. Money and asset growth does me absolutely no good if I don't use it. Get clear about why you want to invest money! Putting 300 euros every month into an ETF is not a goal. It is a measure that could help you to reach your goal. Having X Euro in your portfolio at the end of the year but at the same time following a buy & hold strategy including a savings plan is not a reasonable goal either. The stock market fluctuates and if you are not actively trading, you have no influence on the short-term size of your portfolio.
Of course, the desired goal differs from investor to investor. But money simply for the sake of money does not make sense. Some people want to close their pension gap, buy a house, work only part-time, bequeath as much as possible to their children, show off their assets to others, take a money bath or simply see a really big number in their own account.
That's your goal. Or at least the first step towards it.
Step 2: Formulate your goal
You now know where you want to go? Great. Then make it more concrete. Embellish your desire with details. How big and luxurious do you want the house to be and when do you want to buy it? How much do you want to bequeath so that your children can live a carefree life (who will probably be close to retirement themselves by the time they inherit)? How big is your pension gap and when do you want to retire? ...?
A concrete goal could be, for example, "I want to reduce my working hours by the age of 50 at the latest and make up the difference to my full-time net salary through dividends!"
Step 3: Putting your goal into figures
This is the part where you need all the things you learned about math in school that you thought you'd never need again anyway. Sorry.
To stay with the example from step 2: Just because you now know that you want to reduce your working hours at 50 and make up the difference to your full-time net salary through dividends, you still don't know how much dividend you specifically need. So you have to calculate the gap to be filled. Or in the case of other goals, for example, the capital required at time X. Or how many coins fit into your bathtub for a money bath.
Especially for long-term goals it is important to consider changing parameters - like a higher salary or inflation. Let's assume that 2,000 euros net is currently enough for you to live on and that you want to draw half of that in 25 years via dividends. Then you have to take into account that your cost of living in 25 years will be significantly higher than today due to inflation. If you calculate with an inflation of 2.5% / year on average, in 25 years you will no longer need 2,000 Euros net to live, but 2,000 Euros * 1.025^25 = 3,707.89 Euros. So to reach your goal, you need to generate a net dividend of about 1,853.94 euros and not just 1,000 euros. In addition, it could be that your lifestyle changes in the next few years - e.g. children, more luxury through a higher salary, moving to a more expensive city, ... and therefore your needs may be higher in 25 years. Here you have to make assumptions and consider them accordingly. Overall, I recommend to calculate a little higher than too tight.
Add concrete numbers to your goal. Make it more tangible. Make it predictable. "I would like to reduce my working hours by the age of 50 at the latest and make up the difference to my full-time net salary through dividends. To do this, I need a net dividend of 2,500 euros / month in 20 years, taking into account any salary increases and a reduced tax burden due to the lower income."
Step 4: Write down your options and calculate the required rate of return
You thought that's it for the math? Sorry, now it really starts.
You know your goal and the numbers behind it, but you don't know how to get there. Accordingly, you must now become clear about your financial possibilities. Do you have a large sum available that you can invest immediately? Do you want to save monthly and how high could the savings rate be? Could this savings rate increase or decrease until you reach your goal? ...?
Once you are clear about this, you need to calculate the required rate of return. For example, if you need 300,000 Euros in 20 years and you can invest 50,000 Euros once, the calculation is 50,000 Euros * x^20 = 300,000 Euros. Wolframalpha [1] calculates x at about 1.0937. So you need a return of 9.37% per year to reach your goal.
Another example: You want to invest monthly and receive a payout of 2,000 Euro per month after 25 years without capital consumption. The first thing to do here is to calculate the required capital. For 2,000 euros per month or 24,000 euros per year and assuming 25% taxes on the income, you can reach the goal with a payout ratio of 2% and a capital of 1.6 million euros: x*0.02*0.75=24,000. You calculate with 3.5% payouts? Great, then 914,286 euros is already enough.
What return is needed to generate this capital? For this you can use Excel or tools like [2]. With a monthly savings rate of 500 euros, a target amount of 1.6 million euros and 25 years time, you need a return of 15.906% per year [3]. If you consider a certain return to be realistic, you can of course also turn the calculation around and calculate the monthly savings rate required for the return and target capital.
Now add to your goal the conditions that are given (your financial possibilities) or necessary (the required return) to achieve it.
Step 5: Select a suitable strategy
Now that you know your goal, your financial possibilities and the required return, you have to choose a suitable strategy. Your strategy describes how you want to achieve your goal under the given financial means. From "I just regularly stock a world index" to trading to "back and forth makes pockets empty" there are plenty of possibilities. Besides the classic buy & hold approach of a globally diversified portfolio, getquin also presents different strategies again and again. You can find some examples in the sources under [4], [5], [6] and [7] (naming these strategies is not a recommendation from me, you can find my strategy under [8]). It is important that you ask yourself for each strategy about the expected return (historical data, do they go far enough into the past to be reliable? ...?) and the risk (how likely is it that the return will be achieved, what is the maximum loss in the worst case, how likely is a failure of the strategy? ...?).
You should choose the strategy that is most likely to achieve your target return at the lowest risk. The risk should also be <= your personal risk tolerance. If you get gasps because your portfolio is 0.5% down, you should rather stay away from crypto. Also, the strategy should match your skills (already existing or learnable in a reasonable amount of time) and capabilities. It's no use if you decide to trade based on technical analysis, but you don't know anything about it and you live as a hermit in a desert in Africa without electricity and internet.
Sometimes it can make sense to use strategy A (asset accumulation) for a few years and then switch to strategy B (asset management / consumption). In this case, you should take into account any taxes that may be due on your profits if you switch and set the target for wealth accumulation higher if necessary to compensate for this.
Step 6: Nothing is set in stone
Our world is very fast-paced. Things change from one day to the next. Personally, locally and globally. You should therefore regularly check your goal and your strategy and readjust them if necessary, but please don't throw them over the top every year and start all over again.
Congratulations, you've now set a meaningful financial goal and chosen a strategy that fits it.
What, you are a low-income earner with ambitious goals and you haven't found a strategy that brings you within reach of your goal with your given financial capabilities? Then please read the next steps.
Step 7: You can't reach your goals in your current situation? Then improve your situation
Important: Be focused and rational. It does not make sense to read 50 books about finances. Investing in your human capital is right and important. But please be specific. It would make more sense to look at what will actually help you. Can you significantly increase your income through further education? If yes, then continue your education and apply for a better paying job. Does an active strategy promise a higher return on investment that will help you reach your goal? Then acquire the necessary skills.
Continuing education and new skills can be an insanely great lever to reach your financial goals. Don't underestimate them, but also use them wisely and don't invest time and money in subjects that won't help you reach your goals. Sometimes it makes sense to take a few steps back to get a running start.
Step 8: You can't improve your situation? Then you need to adjust your goal
Especially the first financial goal is often simply too ambitious or your own possibilities are too limited. In this case, unfortunately, there is no way around adjusting the goal. But that's okay. Defining a meaningful goal is usually an iterative process. However, by doing the groundwork, you should now have a sense of what's realistic and what's not. Adjust your goal and strategy with your newfound knowledge and under your given circumstances.
Conclusion
Not worrying about your financial future is easy. To save / invest a few euros a month already requires more work and energy. Accordingly, I think it's great that you're here and very likely already doing that. But to really set meaningful financial goals, it takes much more. You have to deal with it, you have to calculate, you have to deal with different strategies, you have to check and correct regularly and maybe you have to leave your comfort zone sometimes and increase your human capital. But it's worth it. Not only that the probability increases to have actually achieved "later" what you want / is important to you. A goal and a strategy also help you to sleep more peacefully, to say goodbye to unrealistic ideas and to be able to enjoy your life today and not in 30 years. Why? If you know where you want to go, what return you need for it and what financial means you have available, you don't have to invest every cent you have left at the end of the month. No, you can spend it with a clear conscience - you know that you will reach your goal with your strategy even without that cent.
What is your goal? Have you already found the right strategy?
Please, you are welcome.
Your StrategyDonkey
Sources
[1] https://www.wolframalpha.com/input?i=50000*x%5E20%3D300000
[2] https://www.zinsen-berechnen.de/
[3] https://www.zinsen-berechnen.de/sparrechner.php?paramid=eifzwfp7mj
[4] World index + Titans from @Chefkoch256
https://app.getquin.com/activity/SzlYKFECjG
[5] Overview of different strategies from @GetRichorTryin
https://app.getquin.com/activity/oNRQtDbTcO
[6] Global Tactical Asset Allocation by @Epi
https://app.getquin.com/activity/OpanTqOJoV
[7] 3x Leveraged Rotating Strategy by @meta (currently but gone under the bitcoin maxes). https://app.getquin.com/activity/YWrjxizhqG
[8] https://app.getquin.com/activity/NhIGEJGCTA
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