TL;DR:
All investments carry uncertainties with different risk profiles.
Clearer goals enable better-optimized investments.
PS: In the following post, i’ve ended-up with the generic “you”
(you/your, instead of one/one’s that i usually prefer.)
Nevertheless, the thoughts/principles are applicable to anyone thinking along similar lines.
Based on our discussions on this forum,
here’s an attempt to list out the challenges of investing without goals in mind,
that i can think of, in terms that you might be able to relate to.
I hope it helps…
How do you know how much is “enough” without knowing what the needs are
Knowing your needs gives you goals.
Knowing the “when” gives you better defined goals.
The more precisely goals are defined, the more reliably you can plan and minimize risk.
What are you saving for? Are you optimizing for the right thing?
Money is a popular proxy for what you actually want.
Are you sure you need money in future, and not some “X” directly?
Could you be trading away “X” you already have, only to later spend far more money reacquiring it?
If you know what “X” you want, sometimes it’s more efficient to pursue “X” directly,
instead of trying to accumulate money and pay conversion costs both ways.
Money’s fungibility buys flexibility, but that flexibility isn’t free.
The more you know what you want, the less you need to pay for flexibility you won’t use.
As a concrete example:
Consider an illiquid GSEC trading at a discount on the secondary market,
offering an extra percentage point of return over a liquid GSEC of the same maturity.
If you’re confident you won’t need the capital before maturity,
you can capture that extra return by giving up liquidity you weren’t going to use anyway.
This requires knowing your timeline. Your goals.
Without an exit-strategy, you stay perpetually exposed to risk.
Given enough time, even extremely unlikely minuscule tail-risk will eventually occur and result in drawdowns/losses, or even wipe you out.
Without knowing “how much is enough, and by when,” more always seems better.
This would increase the likelihood of you investing in most “opportunities”.
A potential worst case: Taking on unnecessary risk for incremental returns that would make no meaningful difference to your actual life in future. i.e. no effective upside, but only a potential downside.
Ask yourself:
- Is simply holding cash (even if inflation-eroded) sufficient for your needs?
- Have you calculated this? If yes, then good.
- Could plain debt instruments (GSECs, T-bills across sovereigns/currencies) suffice?
- Do you actually need equity exposure at all? Will the incremental returns matter?
- what material difference would it make?
These questions are easier to answer with clear financial targets (amounts, timelines, acceptable ranges).
NOTE: The above is just one trivial example of a ladder or risks.
Can explore/evaluate relevant risks and assets/asset-classes of the “opportunities” you are evaluating.
On the topic of risk - 24 Types of Risks from Howard Marks' 'Risk Revisited Again' memo.
- Losing money – The possibility of permanent loss is the main form of risk.
- Falling short – Not having to make necessary payouts or income to live on.
- Missing opportunities – Not taking enough risk.
- FOMO (Fear of Missing Out) – Jumping on the bandwagon of risky investments for fear of living with envy.
- Credit – The risk that a borrower will be unable to pay interest and repay principal as scheduled.
- Illiquidity – The inability to sell when you need the money.
- Concentration – The risk of not being diversified when sectors drop in value.
- Leverage – Losses are magnified when investments decline in value by using borrowed money.
- Funding – The need to make a capital call when a loan comes due.
- Manager – The risk of picking the wrong one.
- Overdiversification – The standards of inclusion may drop leading to the potential of lower risk-adjusted returns.
- Volatility – This introduces an emotional component that may result in a permanent loss from selling too soon.
- Basis – This applies to arbitrageurs who go long one security and short another based on one being cheaper than the other and common patterns repeating themselves and yet something goes awry where the relationship breaks.
- Model – Excessive belief in a model’s efficacy can lead to excessive risk taking.
- Black Swan – Just because something hasn’t happened doesn’t mean it won’t happen. This is the statistically inconceivable event that materializes.
- Career – If rewards are shared asymmetrically then it may not be in a money manager’s best interest to take risks where there could be short term pain, but long-term pain for fear of losing clients or his or her job.
- Headline – This is when losses are big enough that they can potentially generate media attention.
- Event – Tends to apply to bondholders when the equity owners leverage up the company and put the bonds at more risk.
- Fundamental – Assets or companies underperform in the real world.
- Valuation – Overpaying for an investment.
- Correlation – Being less diversified than expected. Everything goes down much to the surprise of an investor.
- Interest Rate – The risk that higher rates can lower the value of fixed income securities and other yield-oriented investments.
- Purchasing Power – The risk that cash received in the future will be eroded in value due to inflation.
- Upside – The risk of being under-exposed to very good economic and financial events that occur in the future.
Source : Howard Marks’ “Risk Revisited Again” memo
Clarity in Goals adds to your conviction.
Yet another aspect of having clear goals is that
they add conviction to your investment strategy, whatever it may be.
i.e. increases your ability to “stick to the plan” even in changing circumstances.
Note: Sticking to the plan doesn’t mean HODL.
If the plan that was made with careful thought and clarity of your needs,
involves investing/liquidating certain assets upon certain conditions,
then “sticking to the plan” involves doing so when the conditions occur,
and not succumbing to either panic or greed.
Even if the entire world is going contrary to your plan.
(Of course, this benefit of conviction is marginal for already highly disciplined individuals.)
PS: IIUC, you might already be doing goal based investing without thinking of it or calling it as such. 
Maybe some part of your portfolio if not the entirety of it. 
PPS: Goal-based investing isn’t some magic solution that will always eliminate all uncertainity/risks. Rather it can be used as a framework to systematically eliminate risk, or atleast limit exposure to risks only to the extent necessary - as determined by carefully defining goals.
