Mark to market: What if you don't have a goal?
Mark answers a reader question about goal setting.
Question:
Hi Mark,
Love your podcast.
I was wondering what to do if you don’t have a financial goal. If everything is on track for retirement with compulsory super contributions to continue living the life that I want to, what am I investing for?
Answer:
This is a great question. To attempt an answer I am going to go on a bit of a tangent. Psychologist and Harvard Professor Daniel Gilbert articulated a phenomenon he coined the end of history illusion. At a high level the concept is that at almost any age people assume that they’ve become what they are going to be. People will acknowledge that they’ve changed a great deal in the past but most people don’t expecte to change much in the future.
In a nutshell this means that we all have the tendency to underestimate the magnitude of future change. The fact is that we all continue to change throughout our lives. Our interests change, our friends change, our motivations change, and our values change.
We hear a lot about how we need to build financial security to prepare for the inevitable challenges of life – job losses, health problems and unexpected expenses. I couldn’t agree more. Yet life is not just about trying to stave off disaster. A life worth living is also about pursuing our passions and interests.
I will speak for myself here. I too am in good shape for retirement. It was something I focused on when I was younger and if things just keep ticking along I should more than meet my goal. I invest outside of super because I want financial freedom. That is a bit of a nebulous concept but freedom is synonymous with choice. I invest because I want to be able to have choices in my life. I may not know what I will want in the future but that doesn’t mean I shouldn’t strive for the financial flexibility to pursue things that may come up.
It can be hard to equate a goal with financial freedom. A goal is tangible and finite. Financial freedom is ambiguous. It is important to remember why we set a goal in the first place. A goal provides structure to our decision making and provides motivation. The process of defining a goal facilitates the creation of a plan to achieve it.
There are plenty of goals that don’t mean anything in an absolute sense but contribute positively to our lives. Given the time of year there are likely many people with the goal of running 10 kilometers by a certain date. The goal isn’t really about running 10 kilometers – that distance is meaningless and it won’t provide any practical use in anyone’s life. The real goal is fitness and exercise because that is likely to have positive impacts on life. Since “fitness and exercise” is vague we set a concrete goal to develop a plan and provide motivation. We should be doing the same thing as investors.
Since I’m an income investor I have a goal of adding a certain amount of passive income by the time I’m 50. I have some vague notions of what I will spend the income on each year. I have no idea what I will spend the principal on during my lifetime. All I know is that if I hit the goal I will be another step closer to financial freedom and I will have the flexibility to have more choice later in life for whatever I want to do.
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