Goal-Based Investing: A Comprehensive Guide

Using a goal-based investing strategy means to focus more on specific outcomes related to an individual’s goals, rather than trying to outperform the market or certain market benchmarks. Investment goals will and do vary from investor to investor, so a goal-based investing approach will vary as well – the specifics will all depend on an investor’s individual goals.

If goal-based investing sounds appealing, learning the basics does amount to a big lift. Read on to learn what you need to know to piece together a goal-based investment strategy.

What Is Goals-Based Investing?

Goal-based investing, also known as goals-driven investing, is exactly what it sounds like; it’s an investment approach focused on your financial goals, rather than on market benchmarks.

Traditionally, investment strategy focuses on portfolio returns and measuring risk tolerance, or, how much risk you want in your investments. Those factors would then determine your investment strategy and portfolio makeup. Investments can make money in a number of different ways, including yielding interest or dividends which translate to earnings for the investor.

What you choose to invest in, and how much, is known as your asset allocation. And your asset allocation is determined by what you want out of your investment returns and your investment timeline.

For example, your investment strategy might be different if you’re going to retire in five years compared to someone who plans to retire in 25 years. Goals-based investing, by contrast, measures your portfolio against your goals. That allows you to plan for different goals with different investment strategies.


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Crafting and Implementing a Goal-Based Investment Strategy

The key to goal-based investing is figuring out short-term and long-term financial goals.

Identifying Financial Goals and Assessing Risks

In the short term, goals could include saving for a vacation or a wedding; something like a down payment on a house might be a medium-term goal; and setting aside money for retirement — whatever kind of retirement you envision — is perhaps the longest-term goal.

Some common financial goals include: saving up an emergency fund; accumulating enough for a large purchase, like a car or a trip; paying for your kids’ colleges; putting a down payment on a house; caring for elderly parents and other loved ones; and planning for retirement. These all require different strategies and different timelines.

The Process: Discover, Advise, Implement, and Track

The first step in developing your goals and implementing them into a goal-based investment strategy is to take a realistic look at your current financial situation. Talking to a financial professional or advisor may help you refine and clarify your financial objectives. Then, create targets and separate accounts for your various goals.

From there, you’ll want to actually implement your strategy as they align with your goals. That likely includes actually figuring out the investment strategy for each of your investment accounts. For example, you might have a different investment strategy for savings you’re going to use in five years, versus your retirement savings that you’re going to use in 20 years.

Tracking is the final item on the list – you’ll want to keep an eye on your accounts and make sure that you stay on track with your goals, or change gears when needed.

Practical Aspects of Goal-Based Investing

Goal-based investing has some practical advantages, such as that you can adapt your investment strategy to meet your actual needs. Many households have far more goals than just retiring — and have not, historically, had a way to plan for them. The other benefit of goals-based investing is a bit more psychological.

A number of recent studies and research also suggest goals-based investing can have a behavioral impact on how you act—including, how invested you are in your investments and how emotionally you react to market fluctuations. Having a goal helps you focus your efforts. But where to focus them?

Typical Goals and Associated Risks

Some typical investing goals include retirement, a child’s education fund, or even a vacation or new car – there really isn’t a limit. Some people may simply want to accrue a massive amount of money in a retirement account, like $1 million. For some people, that’s doable – given enough time, resources, and fortunate market swings.

But each of those goals has its own risks. For instance, investing to try and accrue enough money to retire likely involves a long-term strategy, and an aggressive one. That may mean investing in riskier assets that are more volatile. Alternatively, investing with the goal of accruing enough money to take a vacation – in three years – may mean using a less-risky strategy, and investing in different types of stocks, bonds, or other securities.

Bucketing Goals into Broad Categories

Many, if not most investors will likely have many goals. As discussed, those can include retirement (a long-term goal), with vacations, tuition, or other goals that are shorter-term. For some investors, it may be helpful to mentally “bucket” those goals into different categories to help reach them.

For example, it may be helpful for some investors to group their shorter-term goals together, and utilize a higher-risk, higher-potential-reward strategy to try and reach them sooner. They could use a less-risky approach to their longer-term goals, such as retirement or funding a child’s education.

Goal-Based Investing with Professional Guidance

As discussed, some investors may find developing a goal-based investing approach to be easier with some professional guidance.

Working with Financial Advisors for Goal-Based Planning

Investors may opt to work with a financial professional for any number of reasons, and developing some goals and implementing those goals into an investing plan could easily be one of them. There are financial professionals out there who specialize in goal-based planning approaches, too.

Effectively, working with a professional to develop a strategy would likely involve identifying or tagging the specific goals or objectives an investor is trying to reach, and then creating a specialized investing plan or roadmap to get them there. Again, the specifics of such will depend on an individual investor, but in general, investors could probably expect some introspection into their hopes for the future, and some discussion as to how, specifically, to achieve those hopes.

Evaluating and Adjusting Your Investment Strategy

Many investors will implement a strategy and then need to tweak or adjust it as they go along – the market isn’t static, after all, and things change. As such, it’s important to be ready to evaluate and adjust your strategy over time.

Keeping Your Investment Plan Up to Date

While the market will see its ups and downs over time, other things will change, too. The economy will expand and contract, investors may have different jobs and income levels, and interest rates may change, too. This can all have an effect on your investment plan, and may require changes.

An investor can do those with the helping hand of a professional, of course, but the point is that a static plan likely won’t be the most efficient in a dynamic world.

Adapting to Changes in Goals and Market Conditions

Goals-based investing also gives you more buy-in as an investor, and more of a say in the process. However, the danger of goals-based investing is you might not fully know what your goals are — or, more likely, what your goals will be down the road. Researchers have found that we often fail to predict how much we will change in the next decade, and in turn, that can have a distorting effect on our goals and how we plan for them.

For example, right now, you might think you want a low-key retirement in a rural woodsy cabin, but what happens if you only invest enough to purchase a small cheap plot of land and then you change your mind in 20 years and need more money? That’s also why you want to re-evaluate your goals regularly and change your investing strategy as appropriate.

Goal-Based Investing Examples

Here’s a simple example of a goal-based investing example: Let’s say an investor’s goal is to accrue enough money to purchase a house. So, they’re aiming for a 20% down payment on a $500,000 home – a total of $100,000. And, they want to start with an initial investment of $50,000, and reach their goal within three years.

Accordingly, the aim is to return 100% over a three-year period. With that goal in mind, the next step is to implement a strategy that has the best possibility of attaining that goal. That means choosing how to deploy or allocate the initial investment to try and give themselves the best chance of reaching their goal.

Again, it may be helpful to have some professional guidance, but an investor may look at investing in specific ETFs or mutual funds, and certain stocks – there’ll be risks to consider, and a bit of tea-leaf reading to try and sense where the market is going. It won’t be easy, but it’s possible to reach that goal.

Similar strategies could be enacted for other goals, too, like building an emergency fund, or retiring. But the nuts and bolts of it all will depend on the individual investor.

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