Goal-Based Investing

DEFINITION of 'Goal-Based Investing'

A relatively new approach to wealth management that emphasizes investing with the objective of attaining specific life goals. Goal-based investing (GBI) involves a wealth manager or investment firm’s clients measuring their progress towards the specific life goals such as saving for children’s education or building a retirement nest-egg, rather than focusing on generating the highest possible portfolio return or beating the market. 

BREAKING DOWN 'Goal-Based Investing'

Consider an investor who is looking forward to retirement within a year, and who therefore cannot afford to lose even 10% of his or her portfolio. If the stock market plunges 30% in a given year and the investor’s portfolio is down “only” 20%, the fact that the portfolio has outperformed the market by 10 percentage points would offer scant comfort.

Goal-based investing aims to get around this drawback of the traditional investment approach, which generally focuses on outperforming the market while staying within the investor’s threshold for risk. Instead, it uses individual asset pools with an investment strategy that is tailored to the client’s specific goals. Thus, if a client’s main goals are to save for imminent retirement and fund the college education of her young grandchildren, the investment strategy would be more conservative for the former and relatively aggressive for the latter. As an example, the asset allocation for the retirement assets might be 10% equities and 90% fixed-income, while the asset allocation for the education fund may be 50% equities and 50% fixed-income.

The two biggest advantages of goal-based investing, according to their proponents, are - (i) it increases clients’ commitments to their life goals by enabling them to gauge tangible progress towards their goals, and (ii) it reduces negative behavioral biases such as impulsive decision-making and overreaction.

Goal-based investing grew in popularity in the years after the Great Recession of 2008-09, as scores of investors realized the extent to which the attainment of personal goals could be affected by a severe bear market. Millions of hapless investors witnessed their net worth plunge dramatically as a result of the global recession that triggered declines of more than 50% in most major markets, as well as the steep correction in U.S. housing prices. 

 

RELATED TERMS
  1. Retirement Planning

    The process of determining retirement income goals and the actions ...
  2. Investment Manager

    A person or organization that makes investments in portfolios ...
  3. Discretionary Investment Management

    A form of investment management in which buy and sell decisions ...
  4. Investment Consultant

    An advisor who helps investors with their long-term investment ...
  5. Investment Objective

    A client information form used by registered investment advisors ...
  6. Aggressive Investment Strategy

    A portfolio management strategy that attempts to maximize returns ...
Related Articles
  1. Investing Basics

    This Investment Strategy Could Be Your key To Success

    Goal-based investing seems like an obvious tactic. But many investors have only a vague idea what their goals are, much less how to achieve them.
  2. Define Your Investment Goals & Objectives

    If you build a house without a plan, what sort of results would you expect? Investing isn’t any different. Without goals – and a well-thought-out plan for meeting those goals – ...
  3. Savings

    Become Your Own Financial Advisor

    If you have some financial know-how, you don’t have to hire someone to advise you on investments. This tutorial will help you set goals – and get started.
  4. Financial Advisors

    Why Goals-Based Investing Might Be Right for You

    With a goals-based investing approach, you can direct your investment philosophy to reach your goals. Here's how.
  5. Your Clients

    Market Sagging? How to Keep Retirement on Track

    Crafting a realistic retirement plan capable of weathering a volatile market for clients can be tough. Here are some tips on how best to do it.
  6. Personal Finance

    Understand Your Role In The Investing Process

    Knowing what to expect when managing your assets will help you achieve your financial goals.
  7. Executive Compensation

    Portfolio Manager: Job Description & Average Salary

    Discover the duties and responsibilities of a portfolio manager, along with education, training and skills requirements, and salary expectations.
  8. Investing News

    Using Time Horizons In Investing

    Time-horizon investing is all about planning. You need to think about your goals and select investments based on the amount of time you have until the goal must be funded.
  9. Savings

    I Make $50K a Year: How Much Should I Invest?

    Find out how much to invest each year if your annual income is $50,000. The key is knowing the final benchmark for your retirement goal.
  10. Investing Basics

    5 Tips to Increase the Performance Of Your Portfolio

    Discover helpful steps an investor can easily take to improve the performance of his investment portfolio by maximizing gains and minimizing losses.
RELATED FAQS
  1. What proportion of my overall investments should be in securities?

    Understand the various factors that should be considered by individuals in regard to investment portfolio management and ... Read Answer >>
  2. What is private wealth management?

    Understand what private wealth management is from the perspective of both the private client as well as the private wealth ... Read Answer >>
  3. How soon should I start saving for retirement?

    Learn about the basics of retirement planning and the reasons why it is so advantageous for individuals to start saving for ... Read Answer >>
  4. What is the difference between portfolio management and financial planning?

    Understand the difference between financial planning and portfolio management, and learn which financial professionals can ... Read Answer >>
  5. What option strategies can I use to earn additional income when investing in the ...

    Discover how risk-averse investors need to build a retirement portfolio. The major factors are diversification and avoiding ... Read Answer >>
  6. What asset allocation should I use for my retirement portfolio?

    Learn the basics of planning an asset allocation strategy for retirement using risk constraints and return objectives to ... Read Answer >>
Hot Definitions
  1. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  2. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  3. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  4. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  5. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  6. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
Trading Center