STEPPING STONES TO FINANCIAL PLANNING: GOAL PLANNING AND ASSET ALLOCATION

One of the biggest mistakes committed by retail investors is that they invest in random investments with an intention of avoiding risks, wealth creation, tax saving, etc. However, this is not the right approach. One must invest in different investment options keeping their end-objective – i.e. financial goal in mind.

When one makes a random investment, they often get confused and lost mid-way and end up stopping their investments before their investments have reached their maximum potential. The end result of random investments is often chaotic. To avoid such circumstances, one must adopt a goal planning and asset allocation strategy. Let’s understand how to do it.

Goal planning

Most advisors recommend investors to stick to the following steps for goal-planning approach:

1. As an investor, you must identify and understand your financial goals
2. Prioritise your financial goals considering the investment duration needed to complete these goals
3. Create a separate financial plan for each goal after taking into factors such as asset allocation and risk appetite. It should also include evaluating the amount of funds required to achieve that goal, expected rate of returns, time horizon, etc.
4. After assessing the above factors, it’s time to implement the financial plan.
5. Your job as an investor does not end at mere planning and execution. An investor must regularly assess their investment portfolio and ensure that their investments are doing the job of achieving your financial goals. Experts advise investors to regularly review their portfolio, at least once or twice a year.
6. After assessing the portfolio, one must make necessary changes as and when required. If you are nearing your goal, it is necessary to adopt the right asset allocation strategy.

Asset allocation

Another important crucial factor in financial planning is asset allocation. The asset allocation strategy comprises of investing your funds in different types of asset classes in specific ratios. Examples of asset classes include equities, debt, gold, real estate, cash and cash equivalents, money market instruments, etc. The asset allocation strategy is basically formulated behind the idea that usually no two asset classes perform in tandem at any given time. Hence, if one type of asset class goes down, another is likely to rise. Hence, asset allocation helps to diversify the investment portfolio and provides stability to your investments in the short run. Additionally, it helps in the process of wealth creation to achieve your financial goals in the long run.

So, create the right asset allocation plan for your investment portfolio after taking into account your age, risk profile, financial goals, etc. You can also take the help of a financial advisor or an expert who will draft the right financial plan for different types of goals. Do not forget to review and rebalance your portfolio on a periodic basis. This will help you to remove the investments that no longer serve your purpose. 

A good financial advisor will help you with all these activities – identifying your goals, assessing your risk appetite, deducing the investment horizon, investing in the appropriate investment options, framing asset allocation strategy, mapping your goals to the right type of investment, and reviewing and rebalancing your portfolio on a regular basis. Happy investing!