This has many names like goal-based investing approach, the cookie jar approach, the envelope approach. In all, it’s one of the oldest and most effective methods of investing.
Question that springs to your mind is why should I set a goal for my investments?
Well, the answer is quite intuitive. A Wiseman once said, “A journey without a destination is an adventure”.
Investing is a journey; you start from point a (in time) with a certain amount of cash and want to reach point b (in time) with more than what you started with.
In investment management world, you have a tenure of investment (time-period for which you want to invest), the initial investment (amount you start with) , the target amount (the value you want to reach). Is that not a goal in itself? Nope. You need the purpose… why are you investing this for?
Spelling out explicitly what you want to do with this investment sets the parameters that determine your course of action and more importantly helps you eliminate many distractions.
It’s akin to Arjuna and the Bird’s eye story. You only see the target and not the tree, nor the forest, nor the branch, nothing else. So that gives you the clear course of action.
To give more explicit example, refer to the table below:
| Name of the goal | Accumulate wealth and earn more return than bank deposit |
| Initial investment (PV) | ₹ 500,000 (5 Lakhs) |
| Tenure (N) | 3 years from now |
| Expected future value (FV) | ₹ 700,000 |
| Required rate of return (R) | 12% per annum (rounded off) |
Here, we are not considering the effect of inflation. Let us say the inflation is 7% and expected to remain at this rate for next 3 years. This means the actual return you get from the investment is (12% – 7%) = 5% because the inflation basically draws down the value of money you have earned.
In the next post, we will discuss on ways to beat inflation and about identifying your investment style.