Investing is not something that comes naturally to people. It’s risky and challenging, especially since most can’t even answer the question as to why they are investing in the first place. Hence why goal based investing is very important
Goal-based investing helps you streamline the process and get your priorities straight. It offers a structured approach that focuses on specific life goals to help individuals “bucket” investment assets to match those predetermined goals. Investment performance is not focused on “beating the market,” as this relates to misaligned risk and timeline, but on meeting a specific life goal.
For example, we all need money for food and utilities including us at Surepath Wealth. This is a “bucket” that cannot be invested in risky assets as you need to meet your basic needs, regardless of market conditions. In a goal-based framework, investors work closely with financial advisors on defining their needs, goals and aspirations (both short and long-term). This is usually visualized as a pyramid with basic needs at the base and aspirations (such as philanthropic desires) at the top.
Goal-based investing consists of building a portfolio on investors’ goals described in their own way. Even though traditional methodology often aims for the highest returns possible, goal-based investing focuses on achieving the financial underpinnings of goals that hold personal value. Goal-based investing helps align objectives and dreams and realize those that are attainable. That can prove to be a rather limiting experience for some but, in the end, investors are empowered with the confidence that those goals to which they are genuinely committed are within reach. To make this possible, the advisor builds a pragmatic and actionable investment portfolio geared to attaining those objectives.
One of the advantages of goal-based investing is that you get to leverage behavioural finance—the emotional component of investing. Many investors focus—and fret—over short-term market movement. Given its emphasis on compartmentalizing assets into different objectives, goals-based investing encourages investors to look past the present moment and instead maintain their focus on the longer-term projection to realize a goal. This can eliminate costly, short-term reactions based on emotion and keep investors focused on achieving what matters most to them (or their client).
This technique works better than more traditional methods because it allows an investor to align investments with their client’s goals. It separates these goals and at the same time – clarifies the time horizon and risk tolerance for each goal. It also achieves better results in matching assets and liabilities. In some cases, “buckets” can be created for guilt-free spending and other times – it provides an important framework for discussing necessary savings rates.
The next time you meet with your advisor, it is worth focusing on and discussing what really matters to you – your life goals. This will help you align your investment objectives with what is important and stay on track while trying to achieve it.