Why Goals-Based Investing Might Be Right for You


Saving for retirement, setting aside money for children’s education needs or buying a larger house are common examples of personal financial goals. The moving pieces that come with a full and busy life make it difficult to stay on top of the daily decisions and periodic planning required to achieve those goals. Enter mental accounting.

Think of mental accounting as the equivalent to the envelope method for a budget. It helps you reach the end goal slowly over time as it helps quantify goals. Investors tend to do well with goals-based investing as it allows them to view their investing as working towards an eventual reality. “The best part is that in their minds it isn’t a ‘dream’ anymore, but a goal – something that can be worked toward and is achievable,” according to fee-only financial advisor Carlos Dias, Jr. of Excel Tax & Wealth Group. A goals-based investment approach helps you shift from a nebulous “I want this” kind of mentality towards one with quantifiable and measurable goals. Before you start a goals-based investment approach, you first need to know where you want to go. (For more, see: Goal-Based Investing: A Strategy Everyone Should Know.)

Start With a Plan

Goals-based investing, and investing in general, is best served with an investment plan. This plan allows you to put in writing what you want to accomplish. Your investment plan should be one of the first things you discuss with your financial advisor to help guide your investment decisions. During times of market volatility, your investment plan will guard against a decision you wouldn’t otherwise make. This approach has become vital during periods of extreme market swings in recent history.

“If you don’t put your plan in writing and you’re not specific about your financial objectives you’ll be more likely to make ad-hoc decisions,” according to Michael Alexenko, chartered financial analyst (CFA) of Royal Asset Managers.The ad-hoc decisions Alexenko mentions might make sense in the moment though they can have a disastrous impact on a portfolio in the long-term. Think of the goal-based approach as a means to ground your investing, so you’re driven to accomplish the specific goals you have in place. (For more, see: Your 401(k): How to Handle Market Volatility.)

For a goals-based investment plan to work, the plan must be specific. It should contain tangible goals you want to reach at specific times. This is what helps turn it from an aspiration to something you’re actively working towards. “Put in place tangible goals, timelines, and key milestones and stick to it. Your plan should be tailored to your needs and include a forecasted retirement date, college planning and even aspirational goals such as regular vacations, hobbies and home renovations,” according to Andrew Crowell, President of Crowell, Weedon & Co. Such a plan might seem difficult to establish. It really isn’t. A financial advisor can help you formulate a plan that is thought out and geared towards you.

Each Goal Has a Different Risk Level

Goals-based investing sounds great, though begs the question of how you manage risk. It bears to reason an imminent goal will require greater liquidity and less risk. Retirement planning, on the other hand, can take on greater risk assuming it’ll be decades before you touch it. For example, you likely won’t invest your emergency fund in the stock market, though you will do so with your retirement investments. (For more, see: What is Your Risk Tolerance?)

Goals-based investing helps guide that risk to take on something more suitable based on the timeframe and goal – thus allowing you to be more responsive and less reactive. This can also be a challenge during times of market volatility where there is greater perceived risk. “By remaining focused on the tangible goal, rather than a number or percentage or emotional experience, human behavior may be more responsive rather than reactive to chaos that can disrupt wise decision making at discrete moments in time,” said Julie Bryan, CFA at Allen Capital Management. Goals-based investing not only helps moderate risk relative to the goal, but it also helps calm nerves during market turmoil.

Forget the Benchmark

In many instances, you hear investment performance compared to how it has performed against its given benchmark. That is a great long-term mindset. With goals-based investing you want an opposite mindset. It doesn’t make sense, but it’s true. Think of it this way – your ability to retire, pay for your children’s tuition or upgrade to a new home will have nothing to do with how a given index performs. It has much more to do with how far you’ve come to achieving your goal. (For more, see: 4 Behaviors that Sabotage Your Investment Goals.)

“The best part of goals-based investing is that it puts a timeframe together of when this particular goal needs to be achieved by. Therefore, the panic that many other investors have with their advisors is not the same because this is a long-term approach,” Dias explained. This gives you as the investor greater confidence when looking at the performance of your portfolio as you see the progress you’ve realized towards each specific goal.

The Bottom Line

You may have many goals in life. Each of those goals have associated events and needs and therefore require a different approach and risk tolerance. With a goals-based investing approach, you can direct your investment philosophy to reach each goal. (For more, see: How to Create a Financial Bucket List.)

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