Saturday, December 15, 2007

MG's 4 goals - (goal # 4)

About one year ago my wife and I set 4 long-term goals (which were recently refined) for our non-registered portfolio. I have these goals indicated on one of my Excel spreadsheets that I use to track my non-registered portfolio. The reason I have them there is so that I can see the 4 goals as a reminder, as well as to check up on my progress regularly. When creating these goals I tried to make them simply stated, specific, challenging, and of course realistic. I thought I would share these 4 goals for our non-registered portfolio in a series of posts. Goal # 1 was shared on my November 4 post, Goal # 2 on November 24, and Goal # 3 on my December 9 post.

Goal # 4
Grow our non-registered investment portfolio to $175,000* by February 1, 2014 (age 35).
*It is important to note that the $175,000 is in 2014 dollars, which will be worth less than $175K is worth right now.

How did I arrive at this goal?
First I'd like to give credit to The Dividend Guy, for introducing me to the calculator located here. I used this calculator to perform the following analysis:

There are 4 variables involved here:
1. Amount of money we can save each month (could be $1,000 - $1,600)
2. Starting Value (current portfolio value of $34,336)
3. Market return rate (could be 8% - 11%)
4. Number of months to end of goal (74 months)

To arrive at what I believe to be a realistic, yet very challenging goal I performed the following:

Scenarios
A - Save $1,000 per month & market returns 8% (low end & pessimistic)
B - Save $1,200 per month & market returns 10% (mid range & average)
C - Save $1,600* per month & market returns 11% (high end & optimistic)
*Keep in mind that over the past 20 months we have saved an average of about $1,500 per month. Also, our goal level of savings as per Goal #1 is $1,000 avg. per month.----------------------------------------------------------------------------------------------------------------------------------------------------------
Results (obtained by inputting scenarios into calculator):
A = Future Value is $151,400
B = Future Value is $185,567
C = Future Value is $235,804

The reason I selected $175,000 as the target value is because I wanted the goal to be challenging, yet realistic. If we can meet Goal # 1 (save avg. of $1,000 per month), we should be able to achieve $151,400 without any out performance from the market. I am anticipating that with some effort we can exceed Goal # 1, and this will put us ever closer to $185,567. The market is the wild card here, but if we can get a solid 8%+ out of the market, and still save around $1,100 - $1,300 per month we should be able to flirt with Goal # 4 which I set at an even $175,000.------------------------------------------------------------------------------------------------
Setting a goal like this is very difficult because you never know what will occur in life as well as in the market. The important aspect though is that we have some sort of framework to set goals in, and the fact that we have a mid term goal like this. Challenges to this goal include going through periods of reduced employment income (as we are currently in), as well as major downturns in the market. When I go back and evaluate our progress on this goal, I will have to take these challenges into consideration when measuring our performance.

I have included a chart below which outlines where this portfolio is coming from over the past several months:




6 comments:

Potato said...

I think you might want to restate/rethink this goal. To me, it seems a little empty, it's sort of just saying "assuming goal #1, try to get >8% overall yearly return."

Does $175,000 at age 35 mean anything to you? Is that the nest egg that will grow to your full retirement fund? Will it signal enough savings to change your other goals and live more frivolously, or to start saving to something other than your non-registered portfolio (RESP/RRSP)? Is it enough principal for one of you to retire and supplement the other's income? Is it the price of a cottage?

Of course, maybe a goal of a portfolio return of >8% (or final value) is enough to guide you in how you invest, what level of risk you seek out, etc. Or if the final value is more important, would you seek out investments with lower returns (possibly safer) if you managed to go over your savings goal #1?

MG said...

potato, I disagree that the goal is empty. In order to satisfy this goal, we likely need to satisfy and exceed goal # 1. Just goes to show that successful savings is the key to successfull investing.

$175K at age 35 means nothing to me except that if we can obtain that value then we have done very well, and met our goal. We currently contribute to Registered accounts and I will be starting and RESP shortly. We will likely not change our investment vehicles over this time frame regardless of our progress.

Our of curiousity, how would you restate/rethink the goal?

Potato said...

Sorry I wasn't more clear... It seems like a good overall target, but doesn't seem to fit with your other 3 goals: since it's so dependent on the other factors, it becomes somewhat complex to use as a guide for your investments. I might suggest "aim for x% total return" instead.

Your other goals seem like good ones to have up at the top of your spreadsheets as daily reminders: one to help you remember how much you have to pack away each month, and how much you can plan on having to invest. One that reminds you about transaction fees. One that serves to guide your stock selection (for dividend-paying stocks). But this one seems too big/meta to really fit in with those as it stands now, it doesn't appear to me to help you steer the course of your savings and investments. It's specific in terms of its end point, but not specific in guiding how to get there. And since that nice round number of 175k at 35 doesn't have any deeper meaning, it also doesn't serve as an emotional "do it for XXX" type goal. So I think maybe reworking it to something like an average return goal would help more directly in making your investment choices, and then $175@35 becomes a "target" rather than a "goal" like the others.

Or, maybe I've read way too much into what purpose these goals are supposed to have for you and am getting pedantic beyond all common decency :)

MG said...

I think I see your point, but I still believe it classifies as a 'goal' even though it is a target dependant on other factors. Goals will always be dependant on other factors for their success. Aiming for X% return depends less on me than on the market, and does little to help my financial well being, copmared with savings... Thanks for your input.

Potato said...

Ok, that's a good point too.

4Life said...

MG: I too found that calculator neat to play with. Congratulations on getting your goals set. I review mine at least once a year, and they usually change.

Best Wishes,
Dividends4Life