Need-Based Investing: Guide to Building a Smart Portfolio
To give a proper direction to anything in life, one needs to specify requirements and develop a game plan. For instance, consider a game of cricket, where all players strategise their approach and play according to a planned strategy, in the absence of which there would be a lack of direction in the game. Investing can be compared to a game of cricket. One needs to plan and strategise beforehand in order to fulfil financial needs; otherwise, the investment is just like an unplanned game, and the investment would not have a direction or purpose to fulfil.
About Need-Based Investing
There might be numerous financial needs that one would want to fulfil in life. These needs can range anywhere from buying the house of your dreams to sending your children to the best education in the world or building a fund for a stress-free retirement. In some cases, the desire could be to get out of debt and build wealth for a stable and better future. However, to do any of these things, one is required to save and invest for a considerable period of time.
Need-based investing comes into play when investment decisions are made based on the individual’s financial needs. With need-based investing, one can define needs, set priorities, and set a horizon to fulfil these needs. When all these aspects are laid out in a proper format, one can set out the perfect plan to fulfil these needs. Just like a map shows you the correct path on how to reach your desired destination, one can create a roadmap where needs are SMART - specific, measurable, achievable, realistic, and time-bound.
Benefits of Need-Based Investing
- Clarity - Since need-based investing helps one prioritise financial needs and set SMART needs, one can have clarity on how to move further in order to fulfil these needs. They can make informed decisions and keep track of whether or not they have deviated from their final destination. Moreover, with needs set out and clarity in the investment plan, investors can control where they invest their savings and can give a good direction to their investments.
- Asset class/product selection - Once an investor has determined their needs and the timeline to achieve them, they can select the most suitable investment product that can aid them in fulfilling their need in a productive and efficient manner. Depending on the need, the time frame, the risk profile, and the amount required, one can decide on the required asset allocation and construct a suitable portfolio with debt, equity, or hybrid products.
- Mental satisfaction - Regardless of how much planning is done for the future, investors may experience unforeseen circumstances that necessitate big expenditures. While such expenditures are unforeseen, planning for them can be done by maintaining an emergency fund. This not only delivers emotional satisfaction but also fosters good spending habits and makes achieving financial needs easier.
- Decision-making - When investments are aligned with needs, investors can make decisions based on regular monitoring of investments. If there is a deviation from the path to fulfilling these needs, it might prompt inquiries, reprioritisation, and replanning by the investor. Regular need assessments and portfolio balancing can help investors use their resources as effectively and efficiently as feasible.
- Avoiding unfavourable choices - Investors, in general, tend to make poor decisions in the absence of need mapping and investment plans. Investors may need a handsome amount to fulfil their needs if they do not have investments linked to these needs. In such instances, people may be compelled to choose between giving up their aspirations, selling possessions, or taking out loans to generate the required finances. However, with adequate time and appropriate planning, investors might avoid making such unfavourable decisions.
- Discipline - Having defined SMART needs can assist investors in maintaining discipline and investing for long-term financial well-being. Investors who do not have well-defined needs may lack direction and purpose, prompting them to divert from regular investments for irrelevant reasons. Investors are less likely to be swayed by emotional decision-making and behavioural biases when their aims are well specified. Furthermore, the consequences of diverging from the plan might push investors to stick to their investing strategy.
In summary, need-based investing is a highly effective method of investing that caters to our individual needs and optimises our financial resources. Its straightforward and comprehensible approach makes it suitable for a majority of people. This method offers a wide range of benefits that can significantly improve an investor's overall financial well-being. By adopting and following this approach, investors can experience a sense of accomplishment from realising their dreams and fulfilling their responsibilities.