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Why do you invest?

Using life goals rather than arbitrary market benchmarks can help you make better financial decisions.

Why do we invest?

Why don’t we just spend all the money we earn and let tomorrow take care of itself?

One possible answer is that we are likely to face a day when our expenses will be more than the income we earn. This may be temporary due to an unforeseen accident or educational expenses, or for more permanent reasons, like retirement. 

Essentially, saving and investing is deferring consumption today with the aim of having something better tomorrow. If my R10 can buy me a buddy Coke today and I won’t be able to buy something more (or better) than that a year from now, I would be better off spending the money now. At the very least, investing should protect my buying power (in other words, keep pace with inflation). Ideally, it should do much more than that.

If you believe you invest to ensure that you are in a better position tomorrow than you are today, the logical next thought may be, well then surely the aim of investing should be to maximise my returns? Higher returns mean more money, which translates into a better living standard, right?

The problem with this argument is that it ignores the issue of risk. It also overlooks how behavioural biases impact decision-making.

Balancing risk and return

Let’s assume the aim of your investment is to maximise your return. If you expect a typical general equity fund to offer returns of around 13% per annum over the long term, and someone offers you 20%, wouldn’t that be a better investment? But the higher the return on offer, the more risk you will have to take to achieve it, and you may get caught up in some dodgy investment scheme and lose all your money. 

It is against this background that goals-based investing (sometimes also called outcomes-based investing) is gaining traction. Simply put, it argues that investors have certain life goals they want to meet, and their investments should be chosen in line with these goals (rather than chasing after returns). This could involve paying for a child’s education, buying a new car, taking a holiday or saving for retirement.

In some ways, this is similar to the liability-driven investment model followed by certain pension funds where the fund aims to accumulate enough assets (member contributions and returns) to meet a future liability (pay a pension). It is also the methodology used by various robo-advisors that ask investors to choose a goal and investment horizon and then pick investments in line with the goal.

Goals-based investing

The goals-based investing approach may not be maximising returns, but this way, investors won’t take on more risk than necessary. Knowing that the investment choice was made with a specific goal in mind also makes it easier to stay the course when the markets get choppy. Many times, investors are their own worst enemies when it comes to switching investments and chasing after returns.

Information recently shared by Momentum Investments at the Investment Forum 2019 demonstrates this clearly. Only 35% of advisors on its platform have managed to get at least inflation for more than half their clients.

Seventy-one percent of clients on the platform failed to outperform inflation during the period they have been invested on the platform. This includes 9% who experienced negative returns.

“This proves that fund picking is not a strategy that is easily rewarded,” says Momentum Investments CEO Jeanette Marais.

One may think the role of a financial advisor is to choose the best performing investments and to maximise the value of our portfolio, but as the regulatory environment increasingly moves in the direction of a principles-based advice model and away from a sales environment, there is an increasing amount of pressure on advisors to demonstrate the value they are adding.

In a sense, a financial advisor is becoming a type of financial life coach.

“Focusing on a real-life goal acknowledges that people invest to meet day-to-day and long-term needs and aspirations – not to simply outperform an arbitrary market benchmark,” says Marais. “This makes a financial advisor’s proposition that much stronger.”

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Why do i invest?
So i dont have to depend on govt grant in my retirement.

Bit light on meat, this article, and it feels like ideas that have been published on moneywen before but the gist i agree with.

I can’t spend all my money so I invest it. For my old age.

…and simply in order to beat the inflation-rate (from a long term view).

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