Can one portfolio help you reach multiple goals?

Suppose you are a 36-year-old with the following financial goals:

• Downpayment for house purchase in 3-4 years (short-term)

• Child’s higher education, beginning in 10 years (medium-term)

• Retirement in 20 years (long-term)

Different goals have different time horizons and priorities. Hence, all goals can’t be managed via one common strategy. Different goals require different asset allocations. A short-term goal will have less equity and more debt. A long-term goal should ideally have much more equity. And for medium-term goals, a balanced approach might be preferable.

Having separate portfolios for each of the above goals helps in easily managing the asset allocation for each goal individually.

Also, you would know exactly how much money you have accumulated for each goal and comparing it with the target, you can easily visualize progress (what percentage of the goal is complete). A common goal investment pool, on the other hand, is much more difficult to comprehend in terms of each goal’s progress.

Avoid a common portfolio approach

A common portfolio approach means taking all goals into consideration and then choosing one common allocation for the goal bucket. Remember that this common allocation has to be a calibrated mix of your individual goals’ asset allocations. So, you cannot randomly pick any allocation for this common pool.

The problem with this approach is that unless one is really mentally savvy with goal-tracking (or using excel) and watching allocations closely, this bucket will always be prone to a big risk — achievement of long- and medium-term goals being compromised due to extra withdrawals for an immediate goal. And this is a natural thing. If you see a lot of money lying in a common pool, you might be tempted to spend more for a near-term expense than you ideally should.

That is not to say that the common portfolio doesn’t have its benefits. Since you have to deal with fewer products it is easier to manage. But this benefit is far outweighed by the bucketing of investments for different goals, which has psychological benefits, is precise, and also easy to understand and implement.

But there is one thing to note in the different-goals-separate-portfolios approach. If you have too many goals that you want to invest in simultaneously, then it’s better to combine the portfolios of a few of them to make things simpler.

Ideally, keep your goal buckets limited to a maximum of 3-4 portfolios. An example of these buckets can be having one exclusive bucket for retirement, one each for the higher education of two children aged 3 and 8 years, and one for a house purchase. As a bare minimum, keep your retirement portfolio separate from all other goal portfolios.

You can have different funds for different goals. But if you want to keep the number of funds limited (which is always a good idea), then you can even create different folios within the same scheme to segregate different goals. Also, if you and your spouse are both earning and investing, then you can split goals between each other and invest separately.

Which approach should you choose?

To summarise and to repeat what I said earlier, for most investors, it is better to have separate portfolios for separate goals. It is far more effective and helps you stay (and feel) in control of your finances at each goal level. The common portfolio may seem like a leaner approach, but it is rather the separate portfolio strategy that is simpler.

But neither approach is wrong. It is up to the individual to decide which approach suits him/her best. More importantly, after deciding on the approach you need to invest the correct amount regularly for each of the goals if you want to achieve them on time.

Also, if you are just starting out and have a small investment base, keep things simple and take the common portfolio route. When your investment portfolio’s size grows, you will have more clarity about your goals and have a more investible surplus. You can then choose to have separate portfolios for separate goals to keep things more trackable and efficient.