What is “Goals-Based Investing”?

Goals-based investing is a simple approach in wealth management that implements dedicated investment solutions with the objective to achieve the highest possible probability of attaining investors’ specific life goals, for example, children’s university education, wedding, or retirement planning. The process involves the services of a professional investor or wealth manager and sets risk boundaries for goals of varying importance. The success of this approach is measured against the investor’s personal goals rather than a specific market benchmark and the expected shortfall in case of market turbulence should be reasonably low.

Key Learning Points

  • Goals-based investing is a modern approach that is designed around the investor’s requirements and specific goals
  • This is based on the investor’s personal goals rather than using the traditional asset allocation model, which is purely focused on the risk-reward outcome
  • The key point is optimizing the risk-reward balance, whilst regularly reviewing the investor’s objectives and circumstances as both they and the markets are dynamic
  • Life goals could include saving for children’s education, personal events, retirement, or estate planning

How Does It Work?

This approach is relatively simple and resembles a sophisticated version of the management of household finances – people put aside money to serve different purposes, for example, rent, utility bills, or holidays. In the event of an unexpected disruption in income streams, money for lower priorities such as holidays could support shortfalls in higher priorities such as rent.

At the beginning of the process, a wealth manager will consult with the investor in order to establish his or her personal situation, financial objectives, and potential short and long-term needs. The next step is to determine a risk frame and time horizon for each objective and design the most suitable risk-adjusted portfolios that will help in achieving these goals. This will result in specific portfolios that will be managed separately and will work towards reaching the best outcome for each objective.

Questionnaire Example

Below is an example of a simple questionnaire that is usually discussed during the initial meeting between the investor and the adviser.

  1. Are there any specific purposes you have in mind for your savings?
  2. Have you got a plan in terms of time frame how to spend your savings?
  3. Do you plan to commit further contributions to your savings – when and how much?
  4. Do you foresee any need to tap into your savings before your long-term aims?
  5. What are your income requirements (if any) at this point and over the long-term?

How To Apply Goals-Based Investing?

As already mentioned, this approach measures success against investor’s objectives instead of a traditional benchmark. For example, if an investor is approaching retirement in two to three years, he or she may now be risk averse and unwilling to lose even a small fraction of their portfolio. Even if the market declines by 25% and the investor’s portfolio is down “only” 15%, that would barely bring any comfort to the investor. Therefore, to mitigate risk the majority of asset should be invested in cash, and a small proportion in lower risk securities such as fixed income.

With longer term goals, such as starting to contribute towards a pension ready for use in 30 years time, investors may afford to take more risk and allocate a higher portion to riskier assets such as equities.