What Is Goal-Based Investing?
Let me explain goal-based investing to you—it's a newer way to handle your wealth that puts the spotlight on reaching your specific life goals. In goal-based investing, or GBI, you work with a wealth manager or investment firm to track how you're progressing toward things like funding your kids' education or building up a retirement fund, instead of just chasing the biggest possible returns or trying to outdo the market.
Key Takeaways
Here's what you need to know right away: goal-based investing is all about hitting those life goals. Think saving for college or securing your retirement—these are central to it. Ultimately, it shifts your focus from high portfolio returns to what really matters in your life.
Understanding Goal-Based Investing
You see, goal-based investing stands apart from traditional investing because success here is about how well you meet your own life goals, not how your investments stack up against the market in any given time. Take an investor who's a year away from retirement and can't risk losing even 10% of their portfolio. If the stock market drops 30% and their portfolio only falls 20%, beating the market by 10 points doesn't help much—they're still short on what they need for retirement. That's why you should prioritize preserving wealth over growing it in that scenario to hit your goal.
This approach redefines success around your needs and goals. If your priorities are saving for retirement soon and funding college for your young grandkids, I'd set up a conservative strategy for the retirement part and a more aggressive one for the education side. For instance, your retirement assets might be 10% in equities and 90% in fixed-income, while the education fund could be split 50-50. It's your individual goals, not just risk tolerance, that guide these decisions in goal-based investing.
The benefits are straightforward: you'll feel more committed to your goals as you see real progress, and it cuts down on rash decisions driven by market ups and downs.
Goal-Based Investing After the Great Recession
Goal-based investing really took off after the 2008-09 Great Recession, when investors saw how chasing high returns could wreck their long-term wealth. Countless people watched their net worth crash along with major markets and U.S. housing prices. In response, various teams have built more comprehensive investment methods. Take Ellevest, a startup that specializes in goal-based strategies designed for women.
Ellevest uses algorithms that factor in things like income changes throughout women's careers and the gender wage gap. Rather than trying to beat indexes like the S&P 500 or Russell 2000, they start by asking about your personality and life goals, then craft targeted portfolios for each one.
Other articles for you
This text explains overdrafts as bank-provided credit allowing transactions despite insufficient funds, covering fees, protection, and management strategies.
Liquidated damages are pre-specified sums in contracts to compensate for hard-to-quantify losses from breaches.
The Veterans Administration, now the Department of Veterans Affairs, provides essential services and benefits to U.S
Negative amortization occurs when unpaid interest on a loan is added to the principal balance, causing it to increase instead of decrease.
The term structure of interest rates, or yield curve, illustrates bond yields across maturities and signals economic conditions for investors.
An inter-vivos trust is a living trust that allows a trustor to manage and distribute assets during their lifetime while avoiding probate after death.
Zero-bound is a monetary policy where central banks lower interest rates to zero to stimulate the economy, often requiring unconventional methods like quantitative easing or negative rates when that's not enough.
A war exclusion clause in insurance policies denies coverage for damages caused by war or related events to protect insurers from financial ruin.
A trade blotter is a detailed record of financial trades used for auditing, analysis, and regulatory compliance.
Unemployment compensation offers financial support to workers who lost their jobs through no fault of their own until they find new employment.