Don’t Mix Up Wants and Goals
30 November 2018
Many years ago, I cashed out an insurance endowment policy that I had contributed to for 20 years. My parents had originally bought it for me as a simple forced savings plan. All it required was a yearly contribution of just $1,000, and I was happy with the amount I eventually received – almost $25,000. However, when I did a Future Value calculation, I was surprised to learn this meant a rate of return of only 2.3%.
For those who are unfamiliar with the concept, an endowment policy is a forced savings plan over a fixed period of time that comes with insurance coverage for the same period. After this period ends, you will be able to claim both a guaranteed return and a non-guaranteed return. However, what everyone should know is that these returns are typically quite low, as part of the premiums will go towards paying for the cost of insurance, and it is only the balance that is invested. It is thus important to also determine whether or not you need the insurance cover, as that will affect your returns.
Whether or not endowment plans are great or poor investments are up for debate. But what they do teach us are two very important lessons for any investor:
Lesson 1 – Set a Clear Goal
My endowment plan had a clearly defined goal: it was a savings plan meant to help with my education costs. It was a realistic long-term plan and helped me focus on staying the course. Unfortunately, far too many investors do not have a similar clear goal when investing in more liquid instruments like the stock or bond market.
Have you ever spoken to a friend or family member who says they are investing because they “want to get a better return than savings or fixed deposit”? That’s not a goal. That’s a want. It does not include any vision of the future or what they expect at the end of this.
What happens then when their investment gets hit by a crisis? When they realise their investment is now losing them money, they’re very likely to panic and sell – because that investment is now doing the exact opposite of what they bought it for. Ultimately, that just results in a pattern of buying high and selling low, and is going to leave them worse off than if they had never invested to begin with.
On the other hand, having a clear goal in mind keeps you focused on working out how to attain that goal by the deadline you set. “I need to accumulate $4 million dollars by age 50 so I can retire early and spend $6k a month” is a goal. “I need to ensure I have $200k in 5 years’ time so I can cover my children’s overseas education” is another such goal. Such clearly-defined goals and realistic timelines provide a proper perspective to investors, and help ensure that they hold on to or keep contributing to their investments over the planned timeline.
In contrast, merely wanting to make more money is not a goal. There is no focus, no end-point and no time horizon, and will only set you up for failure.
Lesson 2 – Be Disciplined
Another important lesson my endowment plan taught me was the importance of discipline. Having a clear goal in mind gave me the discipline to ensure that I did not miss my annual contribution – because that would mean receiving less money when the 20 years were up. It gave me the discipline not to cash out the money early, because I knew that this was meant to last 20 years. It also taught me to develop the near-automatic habit of regularly setting aside money for savings. Without a clear goal in place, discipline goes out the window.
For sure, endowment plans are not as volatile as the stock and even bond markets. It also helps that their statements of accounts arrive only once a year, compared to how investors can check investment statements online 24/7.
What is Your Goal?
The point here is not to recommend endowment plans as a preferred investment, but rather to illustrate how investment success is most likely with a goal-based approach that keeps the investor focused on their end objective. Having a vision of what you want to achieve and a clear timeline of how long you have to achieve it will be much more useful in determining how and in what you invest, compared to merely chasing returns that may not always pan out the way you hope.
As such, it is important that your adviser helps you to determine what investment option is best for you based on your goals, time horizon and criticality of needs.
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