Choosing What Investment Is Right for You

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Choosing What Investment Is Right for You
by Rex Mendoza

Many people ask, “What is the best financial instrument out there?” You think there is such a thing? Always remember that every instrument has its own set of advantages and disadvantages. It’s important for you to create a portfolio suited to your needs that you can build up over time.

The best instruments are those that match specific goals, time horizons, risk appetite, and investment acumen. It is not a one-size-fits-all or a matter of the- best-and-the-brightest advice.

By investing in short-term instruments like time deposits to meet long-term goals, you leave money on the table. Long-term instruments earn more than short-term instruments. Why go for liquidity when you won’t need the funds soon? Many people do this, and they simply roll over their placements, thereby earning short-term returns for long-term commitments. Doing it the other way around will also be problematic. Don’t invest in the stock market the money that you’ll be needing soon. You may be forced to sell when market sentiment is negative and that can lead to losses.

On the contrary, taking excessive risks can make you earn more. But will you be comfortable? Risk-averse people lose sleep over volatility. The added stress may not be worth the increased earnings. The lack of experience and expertise further adds tension and anxiety.

Having your financial objectives on a timeline creates the track and the milestones that you need to reach at precise times to fulfill them. Your retirement, children’s college education, house, and capital for business may be your top priorities. These objectives dictate funding needs which you can estimate at future dates, and by pinning these down, you can move to set aside funds today to have enough when the time comes. You may be overwhelmed by the huge numbers and it may seem impossible. However, you have to keep in mind that you can grow the amount you regularly set aside as your income improves. By channeling more of your income to increase your investments to match future goals, you thereby control your lifestyle and expenses.

The regular formula of the average person is:


This is why investments are low or even zero. Expenses increase as a function of income, and when unchecked, this can even lead to debt. No amount of income will suffice for anyone who knows how to spend. In building up your portfolio, the operating formula has to be:


You have to know what you need to set aside for your future financial goals and your resolve to earmark this amount has to be firm. You may ask, “Will the remaining money be enough to cover my expenses?” Of course it will be enough—because you will make it fit. Ever wondered why you felt it was enough when you had lower income? It was because your lifestyle was much simpler then.

Creating Portfolios through Goal-Based investing

As people build up portfolios, a relevant question should be asked: How do you pursue asset allocation? Fund managers, in their quest to generate competitive returns within acceptable risk parameters, resort to strategic, constant weighting, tactical, dynamic, and integrated asset allocation. Each of these approaches assume certain convictions about markets, securities, and fund management. Depending on their viewpoints, fund managers can switch and combine approaches as they find necessary.

Instead of befuddling you with these professional fund management approaches, I’d rather discuss an asset allocation model that can be most relevant to individual investors. Don’t get me wrong though. These technical approaches mentioned really work and even individual investors can implement these to further refine their own portfolio strategy as they increase their investment competencies. Yet I’d rather highlight an approach that matches the original purpose for starting a portfolio, which is to achieve financial goals.

I’m talking about goal-based asset allocation. Optimizing returns and outperforming the market are not priorities in this approach. The focus is on monitoring how financial and life goals are being achieved and what decision and actions are necessary to ensure that objectives are met.

Let me expound on this. A grandfather is set to retire in a year. Aside from a comfortable retirement, one of his other priorities is to set up a fund for the college education of his grandson who is barely a year old. His nest egg for retirement has always been on a growth portfolio involving stocks which have performed very well. He has enough of a base in that portfolio to ensure that his income stream will not be impaired when he retires. Will it be prudent for him to keep the funds where they are?

The risk of a market contracting by twenty percent in a year is real. Even if his portfolio outperforms the market by ten percent, that will mean that his nest egg will slide by ten percent, which will lead him to miss his target. And since this is his last year prior to retirement, his base will be crucial to establish the regular income which he set. It will be prudent, therefore, to move his retirement money to a more secure set of instruments that will not expose him to that level of risk or volatility. Will it make him earn less? Yes, most probably. But isn’t asset preservation the more prudent move in this case?

For his grandson’s college education, however, his horizon can be long, so maintaining earmarked funds for this in a growth portfolio makes sense. Shifting this to safe instruments will make him miss his target when the time comes.

In goals-based investing, the achievement of life goals takes precedence over generating better returns. the nature of this allocation approach also takes out the negative behavioral biases of people, which is prevalent when they invest to optimize yields. In fact, since the focus is concentrated on the achievement of financial objectives, the impact of emotions are minimized.

Anna and I take pride in the fact that we have consistently achieved our financial goals, and we are also on track to make our other life dreams a reality. Most times, we have even surpassed our own expectations. looking back, I acknowledge the fact that it is not our investment prowess that largely accounted for our results. It is the discipline of living below our means, consistently increasing our investment portfolio over time, and expanding our income stream by developing multiple sources of earnings. In short, we have managed what we can control and this has paid handsome dividends for us within our financial track.

This article is an excerpt from the book, Firing On All Cylinders: How to Reach Your Financial Goals as an Employee, Entrepreneur, and Investorby Rex Mendoza.

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