You may be surprised to hear that investing isn’t just about green and red arrows, projections, candlestick charts, and monthly contributions. While investing involves technical expertise, it’s enriched when you add context to the numbers via your goals.
Goals-based investing puts deeper meaning behind your investment choices and their outcomes. Let’s take a closer look at what goals-based investing is and how it can change your outlook on investing.
What is Goals-Based Investing?
Goals-based investing is a unique approach that establishes your goals as the center of your investment plan, bringing additional customization, meaning, and purpose to your investment decisions.
Goals-based investing reframes the idea of success from markets to your life and answers a bigger question at hand,
“What am I building my wealth for?”
Your answers might be: fortifying your retirement plan, building a business you love, spending quality time with family, and leaving a legacy that spans generations.
Instead of measuring progress solely against market performance, you measure success by how well a portfolio tracks against the goals you set for it.
It might seem a little unconventional initially, but think about it: would you pack and plan for a trip without knowing the destination? Probably not! Let’s connect this idea to your money.
In this case, the “destination” is your unique goals—retirement, transitioning out of being your company’s CEO, building a dream house, paying off debt, funding your kid’s college, etc.
Without a specific, tailored planning and packing strategy (the plan plus the behavior), you put those goals at risk. For example, if you don’t have a personalized retirement plan, you may not know how much you need to save to fund your ideal lifestyle, leading you to work longer than you’d like or scrimp in what is supposed to be your golden years.
Once you know the overarching goal, for example, retiring at 55, your financial advisor can reverse engineer a strategy to help you get there.
First Things First, Find Your “Why”
Head back up to the question we asked a little earlier,
What are you building your wealth for?
Now, go a little deeper and answer,
What’s your “why” for saving and investing?
Here’s a hint: it’s probably more than nice numbers on a balance sheet.
What things in your life are most important to you?
How much energy are you directing toward and away from those things?
Do you want to live a comfortable life in retirement while traveling the world or put a nest egg away for your grandchildren’s education? Perhaps you want to fuel your passion and start a non-profit or sit on the board of a charity where you’ve been a long-term donor. Whatever the answers are for you, goals-based investing brings more purpose and intention to your investment plan.
Investing With An Eye On The Future
Planning with this level of detail also gets you familiar and (more) comfortable with preparing for the future.
A goals-based strategy instills greater confidence in your investments by encouraging you to envision your big picture future. Knowing the things most important to you is very future-minded, a habit that can positively spill over into your greater investment habits.
With bigger picture goals in mind, you’re less likely to make rash decisions during market fluctuations. You understand that the market is volatile and that what goes down must come back up again. And you’re ultimately working for something beyond “now.”
By actively contributing to your future life, your investing strategy has more purpose. Your ‘why’ starts to drive your actions.
A Tailored Investment Strategy for Every Goal
When you know your goals, your financial advisor can help you create a tailored plan to reach them.
Each goal should have the following:
Designated account type(s). Some goals, like retirement, may require a mix of accounts that complement one another, like a traditional 401k and a Roth IRA.
Asset allocation. This refers to the types of securities you invest in. For example, in the wealth accumulation stage, your retirement portfolio may favor equities over fixed income, giving you time to grow and build the bounty you need.
Risk tolerance. Again, each goal has its own risk profile. While you might feel comfortable with risk in retirement, you might not feel as risky if your child is 5 years away from needing money for tuition.
Time horizon. When do you want to accomplish this goal? Is there any flexibility in the timeline? While you may have to wait for the perfect plot of land to build your dream home, you may know you want to do so in 5-8 years.
Remember, each goal is unique, and a comprehensive investment strategy will take that into account. Investing for retirement is different from investing in a college fund, and investing in a college fund differs from investing in your dream house.
Build A Unique Timeline
Not all your goals will come to fruition at once (wouldn’t that be nice?).
One reason that’s true is that your goals occur at different seasons of your life—paying for college, caring for aging parents, retiring comfortably, etc.
With goals-based investing, we can categorize your goals based on the specific time frame for achieving them (also known as time horizon). Depending on your circumstances, some goals will be short, medium, and long-term. For example, if you’re 30 years old, retirement would be a long-term goal, while paying off debt would be a short-term goal.
During this process, you’ll need to look at how much money you want to allocate to each goal. This is where the real challenge kicks in: prioritization.
Time To Prioritize
Prioritizing your goals also helps you look at each goal more uniquely.
This is one of the most difficult exercises of goals-based investing because it challenges you to think critically about what goals matter the most at particular times of your life. During this process, you may realize that some goals may not be achievable or have to be put in a more realistic time frame.
You may end up realizing that a goal from 5 years ago doesn’t fit your life now, and that’s okay—in fact, it’s great. Now those funds can help you pursue the dream that fits your lifestyle today. As life and priorities shift, so can your investing strategy.
That’s why comprehensive financial planning is so crucial to your financial health and wellbeing. Your investing strategy is just one piece of the puzzle, and a comprehensive financial plan shows the bigger picture.
Collaboration Is Key
Together with your financial advisor, a goals-based investment strategy can help reduce stress during market volatility, provide greater clarity to your investing decisions, and increase your confidence about all the progress you’re making toward the things that matter most to you.
A happy retirement is a major goal for many. And a happy retirement starts with confidence that you’ve saved enough money to last a lifetime. But how will you know if you’re confidently in the black?
We can help you run the numbers!
Back Your Goals-Based Investing Up With Data
It’s important to know that your goals-based strategy is working.
Here at Toberman Wealth, we use a dynamic probability method to help you determine the probability of success within your retirement portfolio called Monte Carlo simulations.
We run thousands of these Monte Carlo simulations on a portfolio, income sources, and lifestyle spending during retirement to help forecast the likelihood that our clients will successfully fund their retirement goals.
And our definition of success is rather strict. Typically, before committing to retirement or significant spending after retiring, we aim for an 80% to 90% probability of success. This means that there’s a high chance that you’d never have to adjust your spending or modify your current lifestyle in your golden years.
We never want to advise someone that it’s time to “tighten your belt” at any time during retirement. With us, we help you keep your golden years shining as bright as possible.
We will work with you to build and monitor a plan that helps you reach your financial goals. If you want to create a goals-based investing strategy, or revise your current plan, get in touch with us today for fee-only financial advice.
Craig Toberman is the Founder of Toberman Wealth – a fee-only financial advisor based in St. Louis. He assists families and businesses with strategic financial planning and long-term wealth management. He has over a decade of experience in financial services and has crafted custom financial plans for hundreds of families and businesses.
Craig received a Bachelor of Science (B.S.) degree in Agricultural and Consumer Economics from the University of Illinois and a Master of Business Administration (M.B.A.) degree in Finance from Saint Louis University. He is a Certified Financial Planner (CFP), Chartered Financial Analyst (CFA) charterholder, and Certified Public Accountant (CPA).
Craig is a member of the National Association of Personal Financial Advisors (NAPFA), Fee-Only Network, and XY Planning Network.
Craig lives in the greater St. Louis area with his wife, Ally and son, Hank.