Goals-based investing: a different way of thinking

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.