Goal-based investing is a modern approach to wealth management that prioritizes achieving specific life goals over simply maximizing portfolio returns. This method focuses on defined objectives such as funding children’s education or building a comfortable retirement fund.
Key Takeaways
- Goal-Centric Approach: Emphasizes achieving personal life goals.
- Diverse Application: Can be used for various life goals including college savings and retirement funds.
- Focus on Personal Objectives: Prioritizes personal goals over attaining high portfolio returns.
What is Goal-Based Investing?
Goal-based investing redefines success by measuring progress based on personal life goals rather than market performance. For example, consider an investor nearing retirement who cannot afford significant portfolio losses. If the market drops 30% but their portfolio only loses 20%, this investor may still struggle to meet their retirement goals, highlighting the necessity of a conservative investment strategy tailored to their needs.
Under this framework, investment strategies align closely with personal goals. For a client aiming to retire soon and also save for grandchildren’s education, a conservative approach might be chosen for retirement funds, such as 10% in equities and 90% in fixed-income, while a more aggressive strategy could be employed for the education fund, perhaps balanced at 50% equities and 50% fixed income.
Advantages of Goal-Based Investing
- Increased Commitment: Clients stay engaged by tracking tangible progress towards their goals.
- Reduced Impulsive Decisions: Helps avoid rash decisions in response to market fluctuations, ensuring sustained focus on long-term objectives.
Evolution of Goal-Based Investing Post-Great Recession
After the Great Recession of 2008-09, where countless investors saw their net worth plummet due to market crashes and housing price corrections, the appeal of goal-based investing became more apparent. The focus shifted from aggressive return-chasing to a more structured, goal-oriented approach to safeguard long-term wealth.
Innovative Approaches in Goal-Based Investing
Several firms now specialize in this method, tailoring investment strategies uniquely suited to client needs. For instance, Ellevest has developed algorithms aimed specifically at women, considering career income fluctuations and wage disparities. They design investment portfolios based on individual goals rather than trying to outperform conventional benchmarks like the S&P 500.
By adopting goal-based investing, individuals can remain financially aligned with their personal aspirations and navigate their investment journey with a purpose.
Related Terms: wealth management, portfolio diversification, personal finance, retirement planning, asset allocation.
References
- Ellevest. “What’s Goal-Based Investing, Anyway?”
