Why it’s Important to Invest with an End in Mind

Studies have shown that people who pen down their goals have a higher chance of achieving said goals as compared to people who don’t. It’s likely the same goes for investing; the unfortunate thing is that many tend to start investing without any objective in mind. If you know why you are investing, it will help you to formulate a clearer strategy and avoid unnecessary risks.

Investing for retirement

For example, if you’ve just started work and are planning to start investing for your retirement, that would mean you’ll have a few decades ahead of you to invest in companies over a long period of time.

For average investors who would prefer not to spend too much time on this, a simple investment into an index fund that tracks a broad market index could suffice. In Singapore, the most widely-followed stock market benchmark is the Straits Times Index (SGX: ^STI) and there are two exchange traded funds that tracks its movement, namely the SPDR Straits Times Index ETF (SGX: ES3) and Nikko AM Singapore STI ETF (SGX: G3B).

Over the past 12 years from Apr 2002 till the end of Feb 2014, the SPDR STI ETF has achieved compounded annualised returns of 8.2%, which is a reasonable result if it can be maintained over the next few decades.

For more enterprising investors, the focus can be on finding companies that have good long term growth prospects. The reason for spending more time and effort in such a venture is to produce a return that’s much higher than simply investing in an index fund; investing in shares with long term growth prospects at a reasonable price could likely do just that.

Investing for passive income

Maybe you are already retired and you require an investment that will provide you with passive income for your daily expenses. If your own personal budget shows you needing about S$36,000 a year in living expenses, you can use that as a starting point to create a portfolio of a mixture of REITs and dividend shares. For example, if you have a portfolio of at least S$720,000 with living expenses of S$36,000 annually, you could assemble a dividend portfolio that pays you an average yield of 5%.

If your portfolio size is smaller but you’ll still require, say, S$36,000 in expenses, then a re-thinking of your spending habits could be in order.

Foolish Bottom Line

There are certainly other reasons for investing; some might be saving for their children’s education; some would like to leave a legacy behind by building a trust fund for the next generation. But what’s important here is to have a reason.

Once we are clear on the reason to invest, we can remain steadfast in our goals and not be distracted by the market. If you are investing without a purpose, you might just find yourself constantly in two minds, ultimately resulting in unnecessary losses.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.