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How to juggle different investment goals

At a glance:

  • Map out what each investment goal will cost

  • Recognize your options for each of investment goals, then craft a portfolio for each

  • How many investments in too many?

  • Summary of juggling different investment goals

Introductory investor education covers setting goals, getting a handle on risk, and building a portfolio.

But as your life changes, so will your goals. Say your financial goal right now is retirement. But what happens if you have a child two years from now?

Paying for college will become a goal, too. And maybe buying a larger home three years after that. Or paying for a parent's long-term care. Most investors eventually have multiple investment goals.

Let’s look at general guidance for how to invest for more than one goal.

A trader watches the screen in his terminal on the floor of the New York Stock Exchange in New York October 15, 2014. Stocks suffered their biggest losses in years and the dollar slumped on Wednesday after the latest inflation data from the United States and China fanned worries about a global slowdown, driving investors into safe-haven government debt. REUTERS/Lucas Jackson (UNITED STATES - Tags: BUSINESS)
A trader watches the screen in his terminal on the floor of the New York Stock Exchange in New York October 15, 2014. (Photo: REUTERS/Lucas Jackson)

Map out what each investment goal will cost

The first step when juggling various investment goals is to determine what each goal is and what it will cost.

Review courses on determining the costs of your goals, which discuss in detail how to calculate the cost of your retirement. Then, begin work on the costs of your other goals.

Here is what to consider

Whether you're saving for retirement, for a home, or for your child's education, goal setting comes down to answering a few key questions:

  • How much will the goal cost each year?

  • How many years will I be tapping into this portfolio to pay for the goal?

  • What will the total cost of the goal be?

  • What will inflation do to that total cost?

Once you've answered these questions, you'll know how much you'll need to accumulate to fund each goal.

Prepare for some shock

You may not be happy with the numbers.

You may be trying to save $1 million for your retirement in 30 years, $200,000 to send your daughter to college in 15 years, and $20,000 for a down payment on a home in five years—all at the same time.

How can you do that without working three jobs, investing every penny, and obtaining an unrealistic 30% return on your investments every single year?

Maybe you can't do it all. Perhaps you can only fund half of your son's education—loans, scholarships, and work-study programs may need to play a part.

And maybe that much-bigger home will need to be scaled down to a somewhat-bigger home instead. Or maybe you'll need to put off retirement for a few extra years.

Investing is all about trade-offs. By looking at all of your investment goals together, you can determine which trade-offs you're willing to make.

Recognize your options for each of investment goals, then craft a portfolio for each

Before building your portfolio, consider the special vehicles you can use for each goal. They can make reaching that goal a whole lot easier.

Uncle Sam can help you

For example, let the IRS and your employer lend a hand with your retirement. Both 401(k) plans and some individual retirement accounts (IRAs) allow you to save for your retirement with pretax dollars.

And employers often match some or all of an employee's contribution to his or her 401(k) plan.

College planning has its own set of investment vehicles. Coverdell education savings accounts, 529 plans, prepaid tuition plans, and trusts can all play a part.

Craft a portfolio for each

Different goals require different portfolios and therefore they usually demand a distinct assortment of investments.

Unless you plan to send your child to college at the same time you buy the new house, you'll need the money for those goals at different times.

One portfolio won't serve both goals equally well because a portfolio should change shape as its goal nears. At that point, you should be protecting what you've made rather than trying to eke out further gains.

If you're buying that house in three years but your daughter won't start college for another decade, you should be conservative with your home investment and aggressive with your education one.

And if you have children who will be starting college at different times, you'll probably want to set up separate portfolios for each of them, too.

Take the following steps for each portfolio:

  • Determine your asset allocation for each portfolio. Each portfolio will need a different mix, depending on your time horizon and final portfolio value for each goal.

  • Conceptualize each portfolio. Figure out what types of investments will form the core of each portfolio and what, if anything, will fill out the edges.

  • Draft an investment policy statement (IPS) for each portfolio. While many parts of the IPS may repeat from portfolio to portfolio—your investment philosophy may be the same regardless of the goal, for example—some parts will differ. Creating different statements for each portfolio makes monitoring each portfolio easier, too. Use an investment policy statement worksheet for each portfolio. You can download a PDF worksheet here.

  • Select investments for each portfolio based on the criteria you laid out in your IPS. Choose your investments for each portfolio, then enter each portfolio separately into a portfolio tracking tool, such as those offered online by Morningstar. These tools allow you to enter many different portfolios. That's enough for one retirement portfolio for you and one for your spouse, a college-savings portfolio for each of your kids, a home-buying portfolio, and even a "model" portfolio of investments you'd like to make someday.

How many investments in too many?

There is a danger in becoming a collector of investments.

Not only is it more difficult to keep tabs on a large number of investments, but oftentimes "collectors" make investments for the wrong reasons and lose sight of their goals.

Let your goals lead the way

So are investors with multiple portfolios prone to become collectors? Not necessarily.

True, investors with multiple portfolios may have more investments than investors with one portfolio.

But if their goals are the driving forces behind their portfolios, multi-portfolio investors will not become collectors, no matter how many investments they actually own.

Further, multi-portfolio investors don't have to own dozens of investments across a variety of portfolios.

They can choose a handful of securities that they like and understand and use these securities in their retirement, college-saving, and other portfolios.

An example

For example, you may like a growth & income fund for exposure to U.S. large companies, an international fund for foreign stocks, and a total bond market fund for bonds.

You could plausibly use only these funds in all of your portfolios (if they're available in your retirement plan, that is).

You'd simply adjust your weighting in each depending on your time horizon.

Summary of juggling different investment goals

Depending on how many investment goals you have, you could have more portfolios than you have investments.

That's fine. It all depends on your goals.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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