How to set realistic goals

By Morningstar |  07-01-19 | 
 

Two of Morningstar's experts from the Investment Management team, share what their goals are for 2019. Our in-house behavioural finance experts share their perspective.

My focus for 2019 is to be mindful of the need to be responsive to short-term expenses while working towards long-term goals.

- Dan Kemp, CIO at Morningstar Investment Management, EMEA

Having bought a house in 2018, there is a fair amount of renovation and remodeling required. While I am not going to ignore what needs to be done, I shall not do it at the expense of my longer-term goals. It is very tempting to sacrifice longer term goals to short term spending requirements, especially when faced with these requirements daily, while long-term goals seldom come to mind.

Most of us suffer this ‘temporal myopia’ which is characterized by overspending (and checking our portfolios too often). In order to overcome it, I’ll be setting financial milestones that will prevent me from discretionary spending on the house before I have made sufficient provision for longer-term financial priorities.

I plan to use the work done by Morningstar’s Behavioural Insights team to improve my own financial behaviour. For instance, I shall make the milestones more powerful by writing them down and signing them, as this has been proven to be an effective method of helping stick to commitments.

My focus for 2019 is to take control of my entire portfolio.

- Dhaval Kapadia, Director - Portfolio Specialist at Morningstar Investment Management, India 

I do have a diversified portfolio in place, which has been constructed with my risk-taking capacity and goals in mind. And I consistently invest. So, when I speak of taking control of my portfolio, I am specifically referring to 3 action points.

The very first is to take my vague goals and crystalize and quantify them to figure out an optimal investment strategy.

Once the above has been achieved, it makes keen financial sense to consolidate the portfolio. There could be funds I have no intention of continuing to invest in. Or, substituting one with another. As mentioned, I have diversified my portfolio across various asset classes such as equity, fixed income, cash and gold. Having said that, the number of mutual fund holdings is particularly large resulting in over diversification. One does not require to be all over the place to reap the benefits of diversification.

Simultaneously, I shall make the shift to ‘direct’ mode where mutual funds and systematic investment plans, or SIPs, are concerned. The recent fund investments have been done via the direct mode. Not so in the case of some historical ones. Hence, listing down all the regular plans and converting them to direct plans will be a priority. The savings can be significant, particularly if one doesn’t seek advice or invest through a distributor.

Consolidation to fewer holdings and sticking to direct plans, makes sense for me specifically, from both a tracking and investing standpoint.

Since Dan and Dhaval referred to goals, Morningstar's behavioural scientists have some superb advice.

Ray Sin advises individuals to spend considerable time on articulating their goals.

The reason being that behavioural biases pop up when we look for financial goals because of the emotions involved, the complexities of the decision, and the difficulty of forecasting our future desires.

Many investors rely on mental shortcuts – focusing on readily available information when making judgments about what’s important. For example, an investor who recently attended a housewarming party might say that her top financial goal is to buy a house, simply because that’s top of mind and easy to remember. Such mental shortcuts can overlook other financial goals that may actually have greater importance.

Research suggests that without proper guidance, individuals often fail to identify as many as half of the goals that they later recognise to be central to their plans. Knee-jerk goals may not paint the full picture of a financial life that really is important to the person.

Behavioural science shows that people can sometimes be strangers to themselves. Investors may need help in making good choices and developing plans that make long-term objectives possible. And they should not shirk from taking the help of a professional.

Sarah Newcomb suggests painting a vivid, detailed picture of your future. This way, individuals will be less likely to spend money impulsively and more in step with socking away savings that can be spent later to fulfill big dreams or retire comfortably.

Her research shows that people who are future-minded and think ahead have more savings than those who do not. In other words, people who focus on the future and feel that they create their own financial destiny, tend to save more than others for retirement and other financial goals. Newcomb found that the strongest predictor of good financial decisions is not financial literacy but, rather, a focus on the future.

She suggests that by helping people create vivid, detailed mental pictures of their future, financial advisers may be able to help people make better financial decisions.

Happy Investing in 2019!

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