Goal-Based Investing: What it Means, and How it Works

Published

Thu, 2023-Nov-23 08:03:47

File Photo: Goal-Based Investing: What it Means, and How it Works File Photo: Goal-Based Investing: What it Means, and How it Works

What’s Goal-Investing?

Goal-based investing is a new wealth management strategy that focuses on investing to achieve specific life objectives. GBI focuses on achieving life goals, such as saving for education or retirement, rather than maximizing portfolio returns or outperforming the market.

Understanding Goal-Based Investing

Goal-based investing measures success by how effectively the individual meets their life objectives, not how well their assets do versus the market average.

An investor who plans to retire in a year cannot afford to lose 10% of their assets. If the stock market falls 30% in a year and the investor’s portfolio is down “only” 20%, outperforming the market by 10% isn’t comforting. To retire within a year, that investor must focus on wealth maintenance rather than growth.

Goal-based investment reframes success around client requirements and goals. A prudent investing strategy for retirement and an aggressive one for young grandchildren’s college education might be appropriate for a customer.

An asset allocation for retirement may be 10% stocks and 90% fixed-income, whereas the education fund may have a 50% equity and 50% fixed-income allocation. The goal-based framework bases investment decisions on individual needs and goals, not risk tolerance.

Advantages of goal-based investing:

Clients’ commitment to life objectives is strengthened by seeing and participating in concrete success.
A decrease in market-driven impulsivity and overreaction

Goal-Based Investing Post-Great Recession

After the Great Recession of 2008–09, goal-based investing gained appeal as investors learned that pursuing high returns might harm long-term wealth growth. Millions of unfortunate investors lost money, along with most major markets and U.S. property values.

Many teams have developed comprehensive investment strategies in recent years. Ellevest is a firm that offers goal-based investment options for women.

Ellevest’s wealth management algorithms accommodate women’s career income variations and the gender wage gap. Ellevest tailors investment portfolios to individuals’ personalities and life goals rather than beating the S&P 500 or Russell 2000.

Conclusion

Goal-based investment promotes life objectives.
Goal-based investing includes retirement and education savings.
Goal-investment prioritizes life goals above portfolio returns.

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