Paving the path to your investment goals

Sam Sivarajan has led wealth management teams at several of Canada’s largest financial institutions and holds a doctorate in behavioral finance. He is the author of two bestselling books and can be found at www.samsivarajan.com.

Would you wear the same outfit every day? Would you turn down the opportunity to lead your team in a championship game? Steve Jobs famously wore a black turtleneck every day. Clayton Christensen, an author and Harvard Business School professor, refused to play the championship basketball game in his student days because the game was on a Sunday, his Sabbath. What Mr. Jobs and Mr. Christensen both had was a framework for decision-making. This freed up mental resources and removed temptation when tough choices were thrown at them. They created the right framework for their lives.

Creating the right framework can also help investors make tough choices and avoid temptation. Silicon Valley Bank, for example, recently collapsed because it failed to hedge its interest-rate exposure. A strict hedging policy would have removed the temptation to “second-guess” the market. Many individual investors were hurt after being lured by siren calls of crypto and meme stock investments in recent years. A more defined investment strategy could have reduced such temptations.

This is not a recent phenomenon. It has always existed. There are many investors whose portfolios are littered with the damage trail left by previous fads – the dotcom bubble of the early 2000s, the resource boom of the mid-2000s, the cannabis boom a few years ago and so on. For many of these sectors, the sizzle was more than the steak. This is why planning and having a clear idea of investment goals can be the saving grace for investors.

As humans, we make plans all the time – where we’re going for dinner or which route we want to take to avoid traffic. We also change plans all the time, and we accept that making minor course corrections doesn’t mean we didn’t need a plan in the first place. But in planning their financial future, most people fail miserably. Jonathan Haidt, a social psychologist, talks about the conflict we all have within us between our rational side and our emotional side. He calls the rational side the “rider” and the emotional side the “elephant.” The rider sits on the elephant, holding the reins, and seems in control. But, given the sheer size of the elephant, if the elephant and the rider disagree, the rider is going to lose. The solution is to pave the path – making it easier for the elephant to follow the rider’s direction.

Many investors have a simple investment goal: beat the market. However, that goal is not easy to achieve – in fact, most professional money managers cannot do this consistently. And second, it may not even be a meaningful goal to chase. After all, if our neighbour buys a fancy sports car, it is unlikely we will blindly follow suit. In fact, most investors have several personal goals – ones that matter to our elephants. Most want to provide for their retirement and help their children get established. For these investors, these are meaningful goals.

These goals don’t require beating the market or reacting to every new investment theme or news item. But they do require paving the path for the elephant – through planning and an investment strategy that they can commit to. The goals-based investing approach incorporates investors’ multiple goals and recognizes that, for each of these goals, the investor has a different primary measure of risk and a different attitude to bearing that risk.

Some of these goals are “must-haves” and some are “nice-to-haves.” Saving for a down payment on a house in two years differs from saving for your kids’ college in 15 years, which is again different from saving for retirement in 25 years. One size does not fit all. Different goals require different primary measures of risk and will define different investment strategies. For the down payment, you would put the money in a savings account – you won’t see growth but also won’t have losses. For your retirement, you would invest some of your portfolio in stocks, where your money can grow and you have time to ride out market volatility.

Mr. Christensen said it well: “You can talk all you want about having a clear purpose and strategy for your life, but ultimately this means nothing if you are not investing the resources you have in a way that is consistent with your strategy. In the end, a strategy is nothing but good intentions unless it’s effectively implemented.”

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