Goal-Based Investing

Posted in Finance, Accounting and Economics Terms, Total Reads: 232

Definition: Goal-Based Investing

Goals-based investing, a relatively new investment method or wealth management technique offers a impactful tool to help cover clients against market fear and risk by better understanding and managing preferences, prejudices and behaviours that would determine their financial performance.

By guiding clients to put money in accordance to their special needs, desires and time periods in a way that gives them confidence to go beyond occasional market disturbance, financial analysts can help them differentiate from the commons and improve their own chances for long-term growth.

Instead of focusing only on investment management and performance, goals-based investing is focussed around the investor him/herself. The effectiveness of an investment strategy is not compared only by traditional metrics like market indexes, variances and standard deviation. Certain specific and concrete targets mean a lot to clients, and that is what distinguishes successful advisor’s approach from others. Investment strategies are tailor-made according to each client’s personal ambition. Results are analysed by the client’s progress toward reaching each stated targets. Moreover, risk is defined as failure to completely achieve all those goals. Goals-based investing also understands that investors may have more than one and often goals which may be conflicting. Instead of pooling all the assets of the client into one single portfolio, a different portfolio “purse” is created for each target. A client may want to plan for increasing assets at the time of retirement, or save for a holiday home, do something big for heirs, or wants to achieve any other number of targets, an investment strategy can be specially customized to each goal.

The chart above provides an illustration of how a goals-based investment methodology helps clients put their financial priorities in order based on needs versus wants, and the time period for each goal.



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