Goal Based Investing

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December 9, 2020

Goal Based Investing

What is the goal of investing? For most, the common answer is to save and allow capital to grow.

Whilst this is a good answer on the surface, it only takes a few scratches to uncover the intricacy of investment and the requirement of making a plan. To enter into investment without a plan would be like setting off hiking with no destination, route or timeline. In other words, it can be easy to get lost. This is where goal based investing plays a crucial role.

So, what then is goal based investing?

It’s an investment methodology employed with the objective of achieving a target or goal, such as saving to buy a car, begin a business or take a holiday. The goal itself is yours to decide. The aim here is to find your goal and create a plan based on your profile specifications, a timeline and to invest systematically to reach your destination.

Goal-based investing varies from conventional asset allocation by selecting and matching investment portfolios to specific goals. If you, as an investor, are prepared to take on a diverse array of risk levels to suit different goals, by creating separate portfolios, it becomes possible to mould each allocation to achieve a specific goal. 

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It may seem like a bit of a quagmire of information so let’s have a real life scenario to help with understanding. Let’s contemplate a situation in which an investor wishes to buy a car whilst also planning for a retirement. These two goals will both require investment but naturally will compete with each other unless separated. Because of the difference in importance and the short and long variations in the time-line it would make sense to separate the investments into two portfolios. The amount of risk in investment will be different for buying a car in a year’s time, compared to planning for retirement in 15.

The issue with using the traditional asset allocation portfolio to encompass both of these goals is that the short-term goal can shift the overall focus and end up dominating and obscuring the vision of the long term goal. The tilting of the assets to achieve the nearer goal will result in a preventable conservative allocation, seeing the result of theoretically making the long-term goals harder to meet. Another benefit of goal-based versus traditional investing is the latter is usually measured against a common market benchmark, whereas the former is able to tie performance to real-life events, providing a much more personal approach to investment. This enables investors to keep an eye on extraneous market fluctuations whilst remaining focussed on personal goals with the ability to avoid some market turbulence.

Would you like professional advice on goal-based investment?

A possible downside to goal based investment is that it does require more dedication, the task of managing multiple portfolios naturally means a greater number of man hours. The good news in this respect is that you can certainly seek professional assistance from a trusted private wealth manager, making it largely pain and labour free.

If you have decided that a goal based approach is the suitable method for you, an expert investment manager can work alongside you, ensuring that you have a full understanding of your personal situation. This will create a tailored package that covers financial goals, short term needs and also those needs that are on the horizon. You will together be able to decide upon an appropriate risk level, a realistic time-line to each goal and build the finest adjusted portfolio to reach your objective.

We can offer professional advice for goal based investment portfolios. Get in touch with us to learn how you can profit, today!

If you think this is something you would be interested in, there are a few simple but important questions that you can ask yourself for each goal.

What is the main purpose for you wishing to save?

Do you have any need for income at this time from your investments? If so, look specifically at the amount and over what time period.

Can you anticipate any need to access savings prior to achieving long term goals?

Are you committed to adding to your current savings?

If you can answer these in a way that suggests goal-based investment would be beneficial to you then there are a few final points to consider. Getting the risk-return balance correct is critical to success, but the flexibility of this programme means it can be done whilst keeping the overall goals you have in mind. Your circumstances can change day to day and the dynamic nature of this portfolio means you can adapt to meet the fluctuations within the market and your personal life.

“An investment in knowledge pays the best interest” – Benjamin Franklin