Goal-Based Investing

Goal Based Investing or Goal Driven Investing is an investment methodology where performance is measured by the success of investments in meeting an individual’s personal and lifestyle goals. This differs from conventional investing methodologies, where financial performance is defined as a return against an investment benchmark. This approach results in focus of the investment approach shifting from achieving a higher returns approach to the investment, or exceeding the market returns approach to funding a personal financial goals approach.

Goal Based Investing focuses on investing for a household based on their needs and goals, not on their risk tolerance. It is a similar approach to asset-liability management for insurance companies and liability-driven investment strategy for pension funds but integrates financial planning and investment management which insures that household goals are funded in an efficient manner. Goal Based investing approach has also been employed by university endowment funds in managing their investments.

In Goal Based Investing, the assets are the full set of resources the investor has available, including financial assets, real estate, employment income, social security, etc. while the liabilities are the financial liabilities such as loans, mortgages, etc. in addition to the capitalized value of the household’s financial goals and aspirations. Goal Based Investing takes into account the progress against goals which are categorized as either essential needs, lifestyle wants or legacy aspirations depending on level of importance to an individual or family. It also helps to prevent rash investment decisions by providing a clear process for identifying goals and choosing investment strategies for those goals. These goals may include ability to put children in a good school, retiring early, and be able to afford a quality life after retirement.

Some financial advisors recommend having six months spending saved in an emergency fund. This fund helps satisfy the goal of security. A person’s goals may be short term security (the savings account), intermediate term portfolio for a child’s education expenses and a longer term fund for eventual retirement. The emergency fund should be invested in very short term low risk investments. The intermediate term fund should be longer and take more risk but only moderately. While the long term fund would likely own long dated bonds, stocks and other equity investments. Circumstances of the individual can satisfy the needs of the various goals or make those needs more aggravated. For instance, a pension benefit or annuity can greatly decrease the need for a retirement fund while a scholarship eligible child can reduce the need for a college fund. An employment contract reduces the need for an emergency fund. A chronic illness might increase the need for an emergency fund.


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