Purpose-driven investing
You invest to hit a goal. You trade to hit a target return.
“Would you tell me, please, which way I ought to go from here?” asked Alice.
“That depends a good deal on where you want to get to,” said the cat.
“I don’t much care where,” said Alice.
“Then it doesn’t matter which way you go,” said the cat.
I was just with my wife in her routine pregnancy check-up when I saw on the doctor’s shelf the best-selling book, The Purpose Driven Life.
Then it hit me – a lot of people invest like headless chickens running around!
They invest, for sure, in the bank, in a mutual fund company, directly in the stock market. But when you ask them why they are investing and for what particular purpose or life event, chances are, you get the vaguest answers.
“I invest to make money.” Money for what? A house or a car? Or your child’s education in the future?
“I invest to enjoy life.” In the next few months? Years? Have you thought about your retirement?
“I invest because my money is dead in the bank.” But do you already have an emergency fund? Do you have enough insurance to cover your family’s future needs in case you die early?
These are some usual answers I get from people I encounter. A lot of them pick up the “hottest” investing tips from their friends, stockbrokers, and experts. Some of them are investors in the strict sense of the word. Some are traders and others are, well, speculators.
Investing is buying and holding onto an asset (stock, bond, pooled fund, real estate) for the long term, with the expectation that the asset’s value will increase over time. Trading is buying and selling on a frequent basis.
Speculating is putting your money in something you do not really understand, hoping you’d make a profit.
I am for investing and trading.
However, investing and trading are just the means to an end. Just like running, driving or commuting, you do them to get somewhere. But for you to get there, you have to know where you want to go in the first place.
You invest to hit a goal. You trade to hit a target return.
For instance, you want to fund your child’s P60,000 per semester college tuition in 18 years’ time. That is around P2.67 million at the rate of 10% education inflation per year when he or she enters college. To hit that, you should set aside P39,000 per year for the next 18 years, put the money in an investment giving 14% interest per year. You can also trade the amount in the market, target to hit 14% per year, and do that for the next 18 years.
Investing and trading must serve specific goals. Invest with a purpose. – Rappler.com
Rienzie Biolena is a Registered Financial Planner of RFP Philippines. He is a Senior Financial Advisor at asset management company, and Columnist of Business Mirror and Rappler.
Source: http://www.rappler.com/business/personal-finance/53736-purpose-driven-investing
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