goals-based investing

Different financial advisers have different approaches to investing. The approach I prefer is known as Goals-Based Investing, sometimes referred to as Goals-Driven Investing.

Goals-Based Investing differs from traditional investment models in that it delves very deeply into a couples needs and wants for their retirement. In many cases, a traditional financial manager will only speak to a couple in terms of their current net worth, their attitudes towards risk and how much income they'd like to derive annually from their assets. In my view, this doesn't go deep enough. It ignores various aspects of their lives such as where and how they'd like to live, any legacy they'd like to leave to their children and other heirs and what activities they'd like to be engaged in towards the end of their lives. Focusing on income also tends to ignore expenses. Will it be enough to support both their short- and long-term vision?

Whether a couple would like to enter an assisted-living facility, move in with their children and grandchildren, or age in place will have significant impact on their retirement income plan. In many cases, these are questions my clients haven't even answered for themselves. As we gain clarity, other people's wants and needs often come into the picture. What if things change? Is the plan nimble enough to accommodate an untimely death or an foreseen medical issue?

Even traditional investment managers who think they see the big picture will often only look at post-retirement goals and investable assets. They'll fail to consider current goals such as buying a second home, paying for college or changing careers. They'll also sweep aside non-liquid assets such as expected inheritance, real estate, art collections and even life-long hobbies that produce income later in life.

Goals-Based Investing ChartWhen I meet with new clients, I don't expect them to be able to articulate all of their goals and dreams at the outset. It's not uncommon for a couple to be unclear in the beginning because perhaps they've never had a meaningful discussion about it. As I listen to them, I start classifying each of their statements into one of four categories, symbolized in the chart on the left. First, I separate wants from needs. I use a clear definition of a want versus a need. While someone may feel something is necessary in their lives, it may be that they only desire it deeply. To me a want can be changed, a need cannot. This can be clarified by the statement "I need food, but I want a hamburger." So while we may need to send our children to college, the college we want them to attend may change over time.

To some, Goals-Based Investing may seem like common sense. Aren't all investment strategies based on goals? Not necessarily. Most investment strategies are based on results. A result is not a goal. Neither is a yield, which is how we tend to measure results. A goal is a life event, such as touring the country by motorhome or transitioning to assisted-living. In Goals-Based Investing, we adjust the portfolio based on whether that investment will meet the goals over time, not necessarily because market forces will produce a better yield in the near term, which is how many strategies work. It's one thing to say, "We attained the highest yield possible", and another to say, "We met the goal." They're not necessarily the same statement.

Goals-Based Investing is not the only option out there for couples planning their retirement, but it's the solution I've employed for many years with enough success to continue in this career. If you have your sights set on various accomplishments in your retirement, such as providing for loved ones, living comfortably, seeing the world, or all of the above, then Goals-Based Investing is probably the best strategy for you to consider.

Feel free to contact me. I'll be happy to tell you more.