Financial goals come in all shapes and sizes. In this short post, we look at what financial goals are, and when stock market investments become appropriate.
There’s no doubt about it that investing in the shares of companies doesn’t suit some financial goals. For example, having enough money to pay for a really nice international holiday (assuming we can ever take holidays abroad again!) is a very clear financial goal. If it’s going to cost £2,000 and you can afford to save £200 each month then, in a statement of the very obvious, it’s going to take 10 months to reach your goal. Then you can book it, pack your Speedos and relax.
When does investing not work?
But this is not a financial goal that you would hope to achieve by investing. There are two reasons: Firstly, the timeframe, and secondly, and this is a much more minor point, the costs. Let’s take each in turn.
Timeframes are crucial when it comes to investing. This is because riskier assets – shares in companies being the main one here – can go up and down in value very quickly. In fact, the London Stock Exchange, where many companies list their shares, is open every weekday between 8am and 4:30pm. Shares can be bought and sold at any time in between. Buy and selling moves share prices which can happen second by second for shares that are regularly traded. So if you think about your £200/month over 10 months, it could see-saw wildly in that short time frame. As your goal is fixed at £2,000 for the holiday, if the price of the shares drop and your investment is only worth £1,500 when you need the money, there’s going to be a lot less sangria all round!
Costs are also a factor. Buying shares can cost you a transaction charge of anything up to £10-12. And when you buy UK listed companies you pay stamp duty of 0.5% of the value of your investment. That means your money is going to have to work even harder to cover these costs.
The obvious answer for short term financial goals is to keep the money in cash. It doesn’t need to be in £10 notes in a tin, although if you took that route you’d be getting about the same amount of interest from most savings accounts out there at the moment: basically nothing.
What is anyone else doing about this?
But, by holding cash in the short term means at least it’ll be worth the same value in 10 months’ time when you need it. In fact, according to research from a company called Calstone, 45% off the UK population when asked said the main thing they were saving for was a holiday or some kind of travel. Other things we are saving for in the short term include a house deposit (31%), home improvements (25%), a car (22%) and luxury items (13%). All of these are probably best achieved by working out the total cost, and then working out how much you can afford to save each month. Once you know this, all you need to do is find the best paying savings account you can. Money Saving Expert is the master of finding these.
Longer term financial goals
But what if your financial goals are longer term? Or more ambiguous?
Well the first thing to say about longer terms goals is that this is where investing can come into play. The longer time horizon means those earlier worries of costs and sharp ups and downs of share prices are less of a worry.
44% of us, according to the same survey are saving or investing for our retirements, although that number drops dramatically when you ask people under 30, to just 30%. But the problem with this financial goal is that its a lot less certain. How much will we need to live off? What job will I be in? What age do I want to stop working? how much money will I owe? How much support will my kids need? What property will I own? The answers to all of these have a significant impact, but are very hard to answer accurately especially if you’re fresh out of school or uni and starting your first job.
There are other long term financial objectives that are a bit easier to visualise though. How about the 18 or 21 years between the birth of a child (or grandchild) and their ‘coming of age’? That’s a pretty defined time period, and you could set a pretty defined goal: I want my kid to go to uni and not have to worry about the cost. Current numbers tell us that cost could be as much as £50,000 all in. We talk more about investing for children in this video.
Planning is the key
In either case if you were just to use cash for these financial goals, you would be missing out on the much better long term returns that investments generally provide. The key to making financial goals is to spot them early, and try to define them in as much detail as you can. If they’re longer than 5 years you can start considering stock market investments; anything under 5 years should be considered short term and savings should be held in cash. Yes, you might get a better return from investing that money, but there’s as much chance that you won’t.