Goals-based investing: a different way of thinking

Investing to meet long-term goals and manage financial risks in a changing investment environment requires a different way of thinking.

Tuesday, September 5th 2017, 11:06AM

by AMP Capital

Success in today’s markets requires clarity on the economic exposures of clients’ goals and a flexible approach to portfolio construction. This includes a more dynamic approach to asset allocation and security selection, with a focus on specific outcomes to help investors achieve their goals.

Goals-based investing recognises that people can have a variety of different financial goals based on their unique needs, desires and time horizons. For example, one goal maybe to grow capital over time faster than the rising cost of living, ie above the rate of inflation. Then there are specific goals such as generating a reliable income stream to pay essential living expenses in retirement. In the goals-based approach, investment strategies are then specifically designed around each investor’s personal goals. Just as you may have different bank accounts for different purposes, such as a savings account or a holiday fund, it makes sense to hold different types of investment portfolios aimed at meeting different goals.

Investors today don’t just ask whether their manager is beating market returns when they judge the success of an investment strategy. They want a broader, all-encompassing approach that puts them – rather than investment performance – at the centre, an approach that considers and prioritises their major financial goals. The success of a goals-based strategy is not primarily about outperforming benchmarks, peer groups or market indices. Performance is measured by how well a portfolio is tracking to help meet a stated goal. It’s about being more relevant to individual needs and having a clearer picture of how well you are progressing.

Historically, the investing process would start with a fund manager building a series of high quality portfolios with highest return potential for various given levels of expected volatility (or risk). Clients would then place all their capital in one of these portfolios, one chosen to align with their investment ‘risk profile’. All their financial goals would then be funded sequentially from this portfolio.

However, investors’ financial goals differ in terms of their importance, specific time horizon and risk tolerance relative to each goal. Most people have multiple objectives, so planning for all of them at the same time may be critical to achieving them. By identifying and separating out each goal, and matching it to an investment strategy, progress towards the goal can be monitored more accurately.

For example, a portfolio is going to be different for savings set aside to fund some one-off spending in a few years versus one built for retirement which may be far into the future and then require a regular cash flow. Similarly, people may want to take less risk with funds designated for a core financial goal, such as covering day-to-day living expenses, than funds for more discretionary spending, like an overseas holiday. The investment strategy would likely be quite conservative for the former and more aggressive for the latter, leading to materially different portfolio strategies. If you try to handle this situation with a single strategy, then your outcome may be quite exposed to market performance in the lead-up to funding the first goal.

The key difference with a goals-based approach therefore is that it customises the investment strategy and helps you focus on the right things. It is also a more intuitive approach because it focuses on meeting tangible objectives. If an investment solution aligns with an investor’s view of a goal and measure of risk, it becomes more easily understood and relevant. It also improves the likelihood that investors will stick with their strategy along the journey.

Read the full article in the latest issue of Taking Stock, our online magazine for advisers and investors.

Find out more about AMP Capital’s range of goals-based investing solutions.

Investors should read the relevant Product Disclosure Statement (PDS) before investing. The PDS contains important information on the Fund including specific risks. A copy of the PDS can be obtained from the AMP Capital Investors (New Zealand) Limited website www.ampcapital.co.nz, by contacting the Client Service Centre on 0800 400 499, or by visiting the Disclose website www.business.govt.nz/disclose. The Manager and the Issuer of the Fund is AMP Investment Management (NZ) Limited, Ground Floor, 113-119 The Terrace, Wellington. While every care has been taken in the preparation of this article, AMP Capital Investors (New Zealand) Limited makes no representations as to the accuracy or completeness of any statement in it. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

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