Managing multiple financial goals

In our day-to-day world we balance many challenges. Among these, managing personal finances is one that deserves considerable attention.

The complexity and choice of financial products is ever increasing and the volatility of stock markets has left many perplexed. However, we are becoming increasingly aware of the importance of personal financial planning.

Most of us will experience several 'life events' that will impact our financial requirements. In addition to the ever-present challenge of saving for one's retirement, you may currently have a shorter-term goal of saving enough for a deposit on a home purchase. But what if you have a child two years from now and wish to eventually send that child to an overseas university?

Co-ordinating these different goals into a coherent plan can appear daunting. However, there are concrete steps one can take to bring order and control to the process.

The first step in organising your financial goals is to write them all down and to estimate the amount of savings that will be required for each. The second useful step is to build a separate portfolio for each goal as this will help you stay focussed on your goals and the investments you have chosen to achieve them.

Getting an early start is an important step, followed by maintaining discipline and a long-term focus. By reinvesting your earnings from your investments, you will effectively be earning returns on your returns: this effect, known as compounding, can have a dramatic effect on savings over a long period.

We all hope for a comfortable lifestyle in our retirement years and, in fact, this is generally an investor's most important and largest goal. Ideally, this means being able to maintain your pre-retirement lifestyle during your retirement years.

To build a retirement portfolio, begin with a projection of how much money you are likely to need. Start by calculating your current living expenses and then make some common adjustments.

From the resulting sum, you then subtract any regular income which may be forthcoming, from state or work pensions for example.

Daily market events, such as interest rate changes, market downturns or political uncertainty can affect the short-term value of your portfolio. In such situations, try not to overreact and forego your strategy by trying to time the markets or chase the latest 'hot' investment.

Evidence shows that very few people are consistently successful in these approaches and, by attempting them, chances are high that you will negatively impact the potential of achieving your longer-term goals.

When it comes to saving for goals that are due in one to five years' time, your money should be secure and accessible. If you're investing for less than three years, it may be best to avoid equities altogether as your portfolio may not have sufficient time to recover from shorter-term market fluctuations and truly benefit from the longer-term opportunities equities offer.

For this time period, cash deposits, money market funds or short-dated bond funds could be better options.

For goals of between three and five years, you could consider the bond market.

You can invest in bond mutual funds the same way as into equity funds, and enjoy the advantages of diversification via exposure to a broad range of markets, and types of bonds.

Government bonds offer the least risk, corporate bonds moderate risk and high-yield bonds the riskiest but with the greatest opportunity for returns. Helping you select the right combination is what financial advisers get paid for.

Many investors try to achieve diversification by investing randomly in a number of individual funds, keeping mental notes on gains and losses for each, but not accounting for how each of these investments relate to the others in the portfolio.

In many instances this collection of investments does not provide adequate 'true' diversification. We believe you need to create a blend of investments that perform differently at different stages of market cycles: this should ensure that regardless of what markets are doing, at least part of your portfolio is benefiting from it.

Remember, diversification means spreading your investments across different types of assets, different countries and regions, different industries and institutions, and different styles.

The primary benefit of diversification is that it can smooth the returns in your portfolios so you can better plan for your financial future.

Mr Kowal is a director of Fidelity International Business Development Unit, UK. Fidelity means Fidelity International Limited, established in Bermuda, and FMR Corp., established in the United States, and their respective subsidiary companies and affiliates. Fidelity Funds SICAV is promoted in Malta by Growth Investments Limited and is licensed by the MFSA.