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Course 201
How to Juggle Different Investment Goals

Introduction

The 100 Level of the Investing Classroom's Portfolio trackcovered 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.

The 200 Level of the Portfolio Track will cover many of the issues you'll face when investing for different goals, as well as how to invest for various time horizons.

This course, in particular, offers general guidance for how to invest for more than one goal.

Map Out What Each Goal Will Cost

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

Review Portfolio 102: Determining Your Goals and What They'll Cost, which discusses in detail how to calculate the cost of your retirement. Then, begin work on the costs of your other goals.

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

  • How much will the goal cost each year?
  • How many years willI 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.

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 Goal

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

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. Portfolio 202 and 203 cover the ins and outs of employer-sponsored retirement plans while Portfolio 204 delves into IRAs.

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. Learn more about these options in Portfolio 210: How to Invest for College.

Craft a Portfolio for Each Goal

Different goals require different portfolios and thereforethey 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. For tips on how to do this revisit Portfolio 105: Determining Your Asset Mix.
  • 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. To find out what makes a core holding, review Portfolio 106: Core versus Noncore Investments.
  • 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 our Investment Policy Statement Worksheet for each portfolio. Download the worksheet from Portfolio 108: Creating Your Investment Policy Statement. (Note: The worksheet is available as a PDF file. You will need Adobe®Acrobat® Reader to view and print it.)
  • 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 Morningstar.com's Portfolio Manager. Portfolio Manager allows you to enter up to 25 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.

When Is Enough Enough?

We've talked in previous classes about the dangers of 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.

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.

For example, you may like TIAA-CREF Growth & Income(TIGRX) for exposure to U.S. large companies, Harbor International (HAINX) for foreign stocks, and Vanguard Total Bond Market (VBMFX) 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.

In fact, 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.

Quiz 201
There is only one correct answer to each question.

1 How many investment goals do most investors have?
a. None
b. One
c. More than one
2 Why is it important to map out what each goal will cost?
a. Calculating the costs of your goals will allow you to see whether you can reach all of your investment objectives. There are no guarantees in investing, just trade-offs.
b. Doing so guarantees that you'll have enough money to fund all of your goals.
c. It's not important to map out what each goal will cost.
3 If you have three financial goals, how many portfolios should you probably have?
a. One
b. Two
c. Three
4 What determines your asset allocation for each portfolio?
a. The final portfolio value needed to fund the goal
b. The time horizon
c. Both A and B
5 Which statement is true?
a. You may have more portfolios than you have investments
b. You should have more investments than you have portfolios.
c. You should have more portfolios than you have investments.
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