When you set up an investment portfolio, it’s essential to have a strategy. That doesn’t have to mean complexity. You can make plans as simple as “minimize risk” or “save for retirement.” In fact, most investors do exactly that. But you do need a sense of what you want to achieve and how you’ll get there. There are many tools that can help you set those overall plans. One popular approach is the SMART method. Popularized by the management consultant George Doran in a magazine article, SMART is a method for approaching problems and organizing your thinking. Here’s a summary of that method.
However you set up your portfolio, consider working with a financial advisor for an objective and informed perspective.
What SMART stands for
You can apply SMART to just about any goal-oriented situation, from leadership to personal relationships. It’s useful for investing, too. The acronym stands for:
- S – Specific
- M – Measurable
- A – Achievable
- R – Realistic/Relevant
- T – Time Bound
This mnemonic is helpful not just for setting financial goals, but for building your portfolio to achieve them.
S – Specific
Your goals need to be clear and specific in order to achieve them.
When you set a general or vague ambition, it’s much harder to make those goals come true. This is true no matter what you’re trying to achieve in life. Want to write a novel? Successful writers don’t just pencil in “writing” on the calendar, they hit a word count every day. Want to lose weight? Don’t generally work out and eat better. Make a workout plan and a clear diet.
The same is true in finances. What do you want each portfolio to achieve? Whether saving for retirement, a child’s college education, a new house or something else, clearly identify your financial goals.
The more specific the better. For example, “retirement account” is a goal. But “retire by 65” is even better. “Retire by 65 with $85,000 per year of income” is best of all. The more specific you are, the better you’ll be at building an investment portfolio around your goals.
M – Measurable
Once you’ve set your goal, how will you know if you’re achieving it? That’s where measurability comes in.
This is an offshoot of specificity. Your goal should be clear and specific enough that you can measure your progress towards it. It’s even better if you can set metrics of progress to use as time goes on.
For example, “save for a house” is a fairly vague goal. There’s no good way to understand whether you’re catching up or falling behind. “Save $50,000 for a down payment” is a goal you can measure. You can tell how close you’re getting. “Save $500 per month” is even better. This is an active measurement that you can use and apply.
By making your goal measurable and by setting clear metrics for success, you can adapt your financial plan as time goes on. Are you catching up to your goals and can start moving money around? Have you fallen behind and need to catch up? Making your goals measurable will let you keep track … and keep up.
A – Achievable
In Doran’s original formula, he wrote this as “assignable.” A manager needs to set goals that he can manage, ones that he can turn into projects for his team. In finance, you need to make your goals realistic. The purpose of this exercise is to build a portfolio. You need to choose investments and make a budget, none of which will be possible if you have set unattainable goals.
Say that you earn the median income of $62,000, and you want to save for a house. You could set a goal of buying a $2 million home, but there’s not much use to that. There’s no realistic budget you can build around putting that money aside, nor are there any investments you can make that will generate a down payment worth $200,000 to $400,000. That goal isn’t helpful for your financial planning because you can’t make a plan around something you can’t achieve.
Achievable goals aren’t just about things that are technically possible. This part of the process is about making sure that your goals are truly practical. When you review your finances, are you trying to talk yourself into this financial goal? Is this a goal you can comfortably meet, or do you need a number of rosy assumptions to make the numbers work?
R – Realistic/Relevant
This one is a little bit trickier to understand, but no less important.
While the “A” in our mnemonic teaches you to set goals that your budget can meet, the realistic/relevant step is about evaluating how this goal fits into your overall financial planning. Put another way, where “Achievable” asks “can you meet this goal,” the “realistic/relevant” step asks “should you meet this goal.”
A relevant goal makes sense for your overall life and financial objectives. As you build your finances, you will establish a number of different portfolios and financial goals. You may have an account for retirement, for a child’s college education, etc. Relevant goals make sense for your finances overall and work together. Irrelevant goals conflict with each other or conflict with your long-term best interests.
For example, say you want to buy a boat. Depending on your financial situation, this might be an entirely realistic goal. You can set aside the money each month, let it grow and eventually have the $30,000 you need for a nice pontoon boat. But is it a relevant goal to your overall financial life? Is a boat the right move for you? Will saving for that boat get in the way of your other goals?
Achievable goals are possible. Relevant goals are a good idea. Make sure you have clear criteria for knowing you have achieved your goals.
T – Time Bound
Nothing focuses the mind like a deadline. That’s as true of finances as anything else in life.
Take two possible goals:
- Retire with an income of $85,000 per year;
- Retire at 65 with an income of $85,000 per year.
The critical difference here is, the second goal tells you how long you have to save up. You can build your budget and investments around that time frame, because it clarifies your priorities. How much wealth do you need to achieve your priorities? And how long do you have to build it? Knowing your time frame will help you understand how to budget and invest for each goal.
Like setting clear metrics, establishing a time frame around your goal will help you set the action steps you need to take in order to achieve it.
The Bottom Line
Setting a SMART goal helps you then take the next step of clarifying exactly how you’ll achieve it. This is the financial equivalent of moving from “I want to lose weight” to “I’m going to do the following exercise routine and eat 1,600 calories per day.” It helps you decide how much money to commit each month and how to invest in order to turn a vague financial ambition into a concrete achievements.
Financial Planning Tips
- A good way of thinking is a great start, but it isn’t always enough. Sometimes you need perspective, advice and expertise. We can help. SmartAsset’s matching tool can pair you with a financial advisor in your area who can help you think through your goals and make sure they’re specific, measured, achievable, relevant and timely. If you’re ready, get started now.
- Be sure to take periodic advantage of a calculator to determine an ideal asset allocation and then engaging in passive investing strategies.
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