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. Asset Allocation

    Asset allocation is the process of deciding where to put money ...
  2. Investment Strategy

    Investment strategy is what guides an investor's decisions based ...
  3. Investment View

    Investment view is the analyzing or underlying decision in the ...
  4. Spending Phase

    The period in a person's life following retirement in which earning ...
  5. Blanket Recommendation

    A situation in which a financial professional or institution ...
  6. Investment Policy Statement - IPS

    A document drafted between a portfolio manager and a client that ...
Related Articles
  1. Investing

    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. Financial Advisor

    The Wealth Management Certified Professional Designation

    The recently introduced Wealth Management Certified Professional credential includes a research-based curriculum for advisors.
  3. Financial Advisor

    Retirement Investing Strategies for People in Their 60s

    Here are four things clients in their 60s need to consider when it comes to retirement planning.
  4. Financial Advisor

    Retirement Savings Strategies for Clients in Their 40s

    Here are five ways 40-somethings can plan ahead for retirement.
  5. Personal Finance

    Goals-Based Planning: A Better Way for Your Wealth

    There's a better way to financially plan than only saving for retirement.
  6. Retirement

    How Investors Can Identify Retirement Goals

    Everyone's ideal retirement is different. Think about how you want to spend yours and start saving to make it a reality.
  7. Personal Finance

    6 Ways to Make Sure You Achieve Financial Goals

    Annual goal setting is a necessary yet arduous process. Here's how to stick to your plan.
  8. Financial Advisor

    Retirement Planning Strategies for Clients in Their 30s

    Retirement may not be the top priority for 30-somethings, but it should definitely be on the list.
  9. Personal Finance

    Money and Millennials: Setting Financial Goals

    Managing savings and expenses, and setting goals early in life, will help Millennials get on a path to long-term financial success.
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center