INVESTING • READ TIME: 8 MIN
"The older I get, the more I see a straight path where I want to go. If you're going to hunt elephants, don't get off the trail for a rabbit."
T. Boone Pickens
Orienting Investment Portfolios Toward Your Goals
When you made the decision to begin investing, what goals did you have in mind?
You may have started to save or invest with a specific plan and then later allocated that money for something else. Alternatively, you may have started with many goals, but your investments are compiled using a singular approach. Or, for some investors, the idea of making investments and working with financial planners, advisors, etc. just “seems like the right, responsible thing to do.”
To what extent, though, are you putting your money to work in ways that help you reach specific short, medium, and long-term life goals?
Re-Framing How You View Investments
At RP Wealth Advisors, we encourage our clients to think of an investment portfolio as more than just numbers on a quarterly statement. To help correlate those numbers with reality – “this account and these funds are for my retirement, while this other account will be used to pay for my grandchild’s college education” – we will take a look at goal-based investing.
With goal-based investing, each investment is made in a way that contributes to a specific goal, as opposed to solely seeking the greatest possible return in a portfolio. In “bucketing” your investments in this way, you’ll see account values fluctuate up and down, but that does not wholly represent what that money actually means or can do for you. Remember, the aim is to keep your eyes on the “elephants,” in reference to the quote above, rather than getting side-tracked by the “rabbits.”
Viewing investments through the lens of short-term performance, “hunting rabbits,” offers a narrow perspective. To center your thinking, refer back to the main question: are we investing and planning with a purpose – with goals – in mind?
What is Goal-Based Investing?
Goal-based investing is a relatively new approach to managing wealth. Generally, it merges the investing process with an investor’s specific goals. It differs from traditional portfolio planning methods that measure progress solely against a market benchmark. Instead, the process aligns the investor’s savings and investments to pre-determined goals, which involve multiple time horizons and risk parameters.
At its core, goal-based investing is based on a framework often used by institutional investors called “asset/liability management.” This strategy aims to match future assets with future liabilities (expenses). In practical terms, goal-based investing aims to ensure that you have sufficient funds for when you plan to spend them in the future.
By viewing investments in this light, we are able to avoid thinking about an investment portfolio as one “catch-all” for retirement income, mortgage payments, credit card bills, car purchases, etc. Instead, each investment within a portfolio is made for a specific purpose with its own set of parameters regarding risk, time horizon, and liquidity needs.
One challenge in using goal-based investing is that you may not think of your money in terms of goals. Even if you do, it’s possible your goals are not clearly defined. A goal like, “I plan to retire when I feel ready” isn’t granular enough to inform an investment strategy.
Detailed goal-based investing is one of the best ways to develop a personalized financial plan with investments that are aligned to help you fulfill that plan over the long-term. When you set goals for your investments, you’re identifying what personal purpose you have for your money and what you want to achieve.
Why is Goal-Based Investing Beneficial?
Goal-based portfolio construction is valuable because it helps remind investors and advisors why we are saving, developing portfolios, and investing in the first place.
Our team often recommends goal-based investing to help clients focus on long-term goals in order to avoid worrying about short-term volatility from holdings used to fund a particular goal. Losing some money this quarter is not terribly significant for an investment that will not be used for another 15 to 20 years, for example. Focusing on the long run helps investors avoid the common mistake of moving money away from stocks after markets have fallen—also known as “buying high, selling low” (what we want to avoid).
This method of investing helps instill discipline and foster better investment decision making. Investment decisions are now focused on achieving certain goals alongside the individual’s personal risk tolerance, rather than based on account values on a day-to-day basis.
Another benefit of goal-based portfolio allocation is that it provides a framework for using tax-efficient strategies. Which type of account is best for funding a retirement, making regular withdrawals, or using for big ticket purchases? These are complex questions that require knowledge of rules and tradeoffs among accounts. Some accounts perform better over shorter or longer durations, and others are more useful at different levels of taxable income. Our team utilizes these strategies to help investors get the most from each dollar invested.
Finally, goal-based investing shifts the focus away from the markets and back to the individual investor. For those who use this approach, the objective is not to generate superior returns or beat an index over the short term, but to manage investments to achieve measurable goals. Not all emphasis shifts away from market or investment performance, but it does help individuals to look beyond what may be happening in the markets in the short-term and instead consider a more holistic vantage point over many time horizons.
How Do I Develop Goals to Use in My Portfolio?
For RP Wealth Advisors, utilizing a goal-based approach requires both a deep understanding of the investor and transparent communication. As the investor, you are in the driver’s seat and will be actively involved in the decision-making process, with your investment strategy aligned to your life goals. Over time, your progress will be carefully followed to help ensure that you are on track to achieve your set goals. There is no blanket strategy – the approach is tailored to your own personal roadmap. Your life goals are unique to you, and your wealth strategy should take this into account.
Ultimately, the purpose of having a goals-based investing approach is to help individuals attain better outcomes for their financial independence. Because you have clearly set out your goals from the onset, the approach can provide peace of mind as you track your wealth plan throughout time and towards meeting your life objectives.
With this approach, there is a dedicated focus on the investor in designing a wealth plan that meets their needs and works to achieve their unique goals. It takes into account a detailed understanding of an individual’s personal liabilities, as well as their stated objectives over their lifetime: What do you currently owe and how will this change in the future? What do you wish to accomplish? When do you want to retire and what type of lifestyle do you envision in retirement? It also helps to plan for the many lifetime milestones that will come along the way.
Some common goals (remember, life goals can be investment goals) include:
- Building an Emergency Fund – for accumulating (liquid) money in as a financial safety net
- Planning a Major Purchase – for making a future home, car, college tuition, etc. purchase
- Accumulating Retirement Savings – for those thinking about their future retirement
- Drawing Retirement Income – for retirees withdrawing funds as income
- General Investing – for investing when you’re not sure of the specific future expenditure
Implementing and Tracking a Goal-Based Approach
Goal-based portfolio construction and management begin with the individual investor in mind. A goal-based investing program is an investment process that puts individuals first and can significantly help investors clarify and reach their financial goals.
After establishing your goals and timeframe, the next step is to accumulate and invest the required funds. Saving – often referred to as the “envelope budgeting method” – is generally not sufficient for meeting your goals, though. If the interest rate on your savings or ultra-conservative investments is lower than inflation, it will not help you meet your goal. This is where elements of (managed) risk come in.
Our team can assist you in crafting a portfolio with the appropriate investment products to help you earn the required return on your investment to meet your goals. Based on your risk tolerance and multiple time horizons, you will most likely need a diversified basket of stocks, bonds, mutual funds, etc. to achieve each of your goals. A blanket strategy, in most cases, will not suffice for meeting each short, medium, and/or long-term goal.
Another essential consideration is your monthly income and expenses. Will you have a surplus to invest on a consistent basis? When you work through these questions with RP Wealth Advisors we can help you identify, develop, and work toward goals within your “investment reach.”
And, finally, remember there is no perfect, single time to start investing. Ideally, whenever you plan for a goal, that is the time to begin your investing journey. The earlier you begin your investing journey, the greater the possibility of achieving your goals with lesser amounts of money (thanks, compound interest1).
Some Final Thoughts (& How We Can Help)
Most people have financial goals, but we seldom get around to clearly articulating them. This is normal, though - planning for the future is not something we do every day.
One of the most significant benefits of goal-based planning is that it forces us to consider what matters most. Do we really need a vacation home if it means we have to sacrifice other goals (such as saving for a child’s education)? What dollar amount do we actually need today to fund our "tomorrow" goals?
We have limited capacity for imagining multiple future goal scenarios. The process of defining goals, estimating savings needs, and then weighing tradeoffs to meet future goals transforms investments from numbers on a screen into a tool that can make life better. Our team at RP Wealth Advisors is here to assist at each step of the way to help you build toward and realize your future financial goals.
1. Compound Interest Calculator, United States Securities & Exchange Commission, https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
The content is developed from sources believed to be providing accurate information. All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy referenced here will be successful. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by RP Wealth Advisors to provide information on a topic that may be of interest. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.