Know your goal, or stop running

In a way this rule sums up the beginning and the end of all trading and investment rules. It applies equally to a trader and an investor. Like the old quote, “If you don’t know where you are going, it does not matter how fast you run”. Your objective should be defined clearly. Are you looking to beat the index? Are you looking to better debt? Are you only keen on capital? Or do you want multi-baggers?

Defining your investment goal

This rule, in a way, sums up the crux of trading and investing. When I had asked a retired officer, why he wanted to trade in the market, his off-the cuff response was, “I have a lot of spare time”. This kind of a goal can be disastrous. You need to clearly define what you plan to achieve in the market. If you do not define your goal, you are unlikely to have a target to work towards.

Setting a goal becomes critical because it defines the quantum of risk you are willing to take and are permitted to assume. For example, if you are looking at just getting better returns than an FD, you need not take undue risk in the market. Just focusing on blue chip stocks and buying them on corrections should be sufficient to beat the returns on an FD. But first define your goals.

Defining your goal helps crystallize quite a few things. Firstly, it allows you to decide how much risk you need to take. Secondly, it also defines whether you need to keep liquidity easily accessible or not. Thirdly, it directs your strategy better. For example, if your aim is to create a blue chip portfolio, don’t waste your time trying to make money on penny stocks. Rather focus on your goal!


Define your return expectations…

This can either be absolute or relative. You can decide on the alpha you want to earn or purely by what spread you want to better the FD rate. This is the primary goal, which will pave the way for understanding your appetite.

Define your risk capacity and risk appetite…

This is a critical component. It will be largely a function of your return expectations, but it will also be a function of your risk-taking capacity. Your age, your income and your net worth will determine your risk capacity.

Long term goals and the equity sync…

Equity can also become a part of your long term goals like retirement, future pension, child’s education. Ideally, equity fits better into distant goals. The quality of equity will have to be more portfolio-oriented in this case.

“Setting goals is the very first step towards converting the invisible into the visible” – Tony Robbins


  1. You are able to direct your equity trading and investment towards a plan. You know the amount you are willing to lose in trading. Your risk will be circumscribed by that. You also know the risk that you can take in your investment strategy. Not to forget, time works in your favour.
  2. You have the time to rethink and rejig your investment strategy. For example you may have begun with the assumption that a focus on cyclical stocks will take you to your yearly targeted returns. Half way, you have the flexibility to shift focus to another sector, which looks more attractive.
  3. You are able to better match your assets and liabilities. Equity is a long term asset class and you cannot rely on equities for your short term commitments. This enables you to piegeon-hole your investment products to your specific liabilities. This ensures that asset liability mismatch is avoided.
  4. You are able to make the best of automated and rule-based plans. For example, your long term goal can be achieved through a systematic investment plan. It creates wealth over a longer time horizon as well as matches your monthly cash inflows. Thus it address returns and liquidity for you.
  5. You are compelled to look at realistic data to achieve your goals. Your future retirement needs will be based on your expenditure patterns. Your expenditure patterns will be an extrapolation of your existing pattern. This forces you to use authentic data for your goals, making the entire activity more real.
  6. Finally, you adopt a more scientific approach towards your savings / investment breakdown. In most cases, it is done randomly. Clearly laying out your goals helps you decide how much you can spend, how much you can save, how much you can trade and how much you can invest for the long term.


Creation of the goals is just one part of the story. The more complex part lies in constantly reviewing your goals and adapting it accordingly. For example, you may have started out as an aggressive investor. But exigencies in the family or losses in your business may force you to become more conservative. You need to rework your goals in this case, depending on your new priorities. Even in the absence of exigencies, constant monitoring is a must.

In the normal life cycle, goals need to be modified for a variety of reasons. Firstly, a change in your marital status and responsibilities will involve a change in your goalposts. Secondly, as you grow older your risk appetite reduces and the need for liquidity becomes more important than wealth creation. Last but not the least, external factors like inflation, deflation, interest rates etc.. may call for reworking your goals. If you have assumed 10% interest and if rates are down 3%, then rework.


When you plan your goals in advance, it enables you to achieve a lot more than merely adopting a random approach. As Tony Robins rightly said, “Conservative and impotent goals tend to make people lazy. When goals do not inspire you, it shows in your performance and in the performance of your investments”. Setting goals in your investment process forces you to look at reality more closely, compels you to rethink and rework your goals and never permits you to take your eyes away from the post.

The legendary pugilist, Mohammed Ali, rightly said, “What keeps me going is goals”. That is very true of your trading and investment performance. Look for that extra alpha. Search for the newer avenue to make that extra return. When you know that you are up against a steep goal, it forces you to think differently and act differently. In the process, the clarity of where you want to reach creates a trading and investment environment which not only generates alpha but also takes you to your goal.

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