The team at Mintos, a peer to peer lending marketplace, notes that goals are proven to have an “energizing” role in our lives, and the higher or greater the goal, the more effort we are likely to put into achieving it.
Mintos adds that by having clear investment goals, we are more likely to hold onto our “better-performing” investments for longer since our focus will be on achieving our targets instead of spending too much time thinking about the gains or losses of individual investments.
The Mintos team has shared common investment goals and strategies that should help investors with making sensible investments while taking into account risk tolerance.
The main takeaways from Mintos’ report are as follows:
- Investment goals are set “based on current and future financial circumstances and depend on income, age, and future outlook”
- Goals can be set using the SMART framework (more on this below)
- Risk tolerance is “not only defined by personal preference but also the risks required to achieve each objective”
- Asset allocation is “where you choose how much you will invest in which investments, based on your goals”
The Mintos team explains that short-term goals (3 – 12 months) primarily focus on preserving capital and are suited to certain types of investments, “whereas medium to long-term goals focus on wealth generation.”
While explaining why it’s important to set investment targets, the Mintos team writes in a blog post that over the years, researchers have observed that many investors, regardless of their level of experience, “tend to sell successful investments while holding onto losing investments – something that’s called the ‘disposition effect’.”
According to Mintos, this happens because we are influenced by “many things when making investment decisions: our jobs, where we live, and the media.” A research study on this effect revealed that investors were “50% more likely to sell successful stocks than losing stocks” and as a result, “total investment returns over time can be much lower.”
According to Mintos:
“A proven way to reverse this effect, however, is by setting investment goals. With a goals-based investment approach, instead of making financial decisions that focus on the outcomes of individual investments, you look at what’s required to meet your overall goals. This approach can help investors to meet their future financial responsibilities by generating long-term wealth.”
More than 500 studies have revealed that individuals who set “specific, challenging goals perform better than those who set ‘non-specific or ‘do-your-best’ goals,” the Mintos team noted while adding that the following SMART framework has “real relevance” when it comes to setting investment goals.
A SMART goal is:
- Specific: clear and well-defined
- Measurable: can be measured by a specific outcome
- Achievable: needs to be practically achievable
- Relevant: has real relevance to what you want to achieve
- Time-based: defined by a time-frame
As mentioned in the blog post from Mintos, asset classes offer different benefits “depending on the time frame and risk required to achieve each goal.” For example, if your objective or goal were to purchase a new automobile, you would have a “short-term” time horizon.
As noted by Mintos, short-term investments tend to offer lower returns however they are quite liquid, and you can “generally cash out” your funds within 3 – 12 months.
Mintos added that for goals with a medium to long-term time horizon, however, investors aren’t planning “to need the money invested straight away, so the focus shifts from protecting short-term capital to future wealth generation.”
According to Mintos, the primary benefit of longer-term investments is that “returns can be much higher.” They might also help with overcoming certain investment obstacles “by “riding out” peaks and drops in the market, providing more consistent returns over time.”
The company also mentioned:
‘When it comes to investing on Mintos, … we’ve found that our investors tend to earn more consistent returns over a longer time period.”
As noted by Mintos, the following asset classes “tend to be more volatile” (higher-risk) or require “longer investment terms” so they are suited to longer-term goals:
- Shares (also known as stocks or equities)
- Real estate or REITs
- Medium and long-term bonds
- Commodities
- Alternatives such as loans
The company adds that on Mintos, they have observed that investors with “highly diversified” loan portfolios are able to (usually) generate more stable returns “on average.”