March 5, 2008
Can you set a personal goal that depends on the stock market?
Posted by siliconprairie under Finance, GoalsNo Comments
While I recently trimmed down my “portfolio” of personal finance blog feeds, I still have enough that around the end of the month I notice a lot of posts about financial goals. While it’s hard to find fault with encouraging people to set goals and work towards them - or have any kind of financial plan - I’ve noticed that many bloggers set goals that depend on things like the stock market. Some of them give monthly updates on these goals, seemingly going against the common advice that long-term investors don’t need to check their portfolio more than once a year.
There’s good and bad in this type of situation. At one level, it’s absurd to say that your personal goal is to have the stock market go up by 1% this month except for a very small group of people. I’m firmly on the side that goals should be based on things that you have a strong influence over, otherwise you’re left with things that are little better than buying lottery tickets. For example, I have a better chance of making money this year by increasing my productivity than by hoping the companies I’m invested in increase their profits significantly. However, there are two ways you can incorporate something beyond your control into your goals.
One way is to consider that often the benefit of a goal isn’t just that you’ll get x in y months. For example, if you set out to lose 20 pounds in 6 months some people might say that’s ridiculous because you can’t control what your body does unless you have a saw and a spare limb. They’re overlooking the fact that by saying where you want to go, trying to get there, and measuring how far you go, you’re growing from the experience alone. If the first goal fails you know more about what’s realistic and what doesn’t work.
So with the larger process of setting goals the fact that your first attempt sometimes doesn’t work isn’t significant. It’s really an ongoing series of goals that become more realistic and more effective with each try. In that context you can set goals that rely on things you can’t control directly, and if they don’t work out the way you want you set another goal that’s more realistic or tries a different approach.
The second way this type of goal can help is by looking at longer time frames. If you have a retirement plan that depends on an 8% average investment return over the next 30 years that’s more realistic than saying the stock market should go up every month this year. Even in this case you can’t assume that what’s worked in the past will automatically work again. You still have to follow your progress from time to time and consider changes such as more small cap and foreign investments if the actual performance doesn’t live up to your expectations.
If you really want to be in control you can also try value cost averaging, where you set a target for your porfolio value at regular intervals and make up the difference with extra investments where necessary. This has the advantages of keeping you in control and helping you invest in things that are below market value and have better chances of going up (the opposite of letting tech stocks dominate your porfolio in 1999/2000). It’s harder to do for most people though, because it can’t be done passively and you need to have extra cash available when your portfolio needs a boost. This probably isn’t what personal finance bloggers have in mind when they write for beginners.
In the end I still think that having a monthly goal depending on the actions of millions of people who live far away is taking too much out of your hands. You can make investments returns of various kinds a part of your plans though. To make it work you just need to look at the right time frame and see it in the context of refining your efforts to get what you really want.