Goals-based investing redefines how you measure success. When you construct a portfolio, you don’t make choices simply based on your risk tolerance or expected returns. Rather, your decisions are predicated on how an asset – such as a stock or bond – will help you achieve short- and long-term financial goals.
“A portfolio’s success shouldn’t be measured solely by performance,” Schuler explained. “Instead, its value should be based on whether it will help you meet your goals. Each strategy should be driven by a specific goal.”
Not sure whether goals-based investing is right for you? Schuler outlined the six steps investors need to take to practice goals-based investing.
1. Define Your Goals
This step is obvious but necessary.
“A typical investor has multiple goals, such as retirement, funding their children’s college expenses or buying a vacation home,” Schuler said.
Ultimately, the combination of goals is unique to each investor, but goals-based investing gets prescriptive around those goals.
“Investing to pay for your kids’ education expenses is going to be different than investing for a retirement that is five years away,” added Schuler. “At the outset of this process, you should clearly define your individual goals so you can develop a more thorough investment strategy.”
2. Ask the Tough Questions
Some goals just might not be feasible, or you will have to pick and choose which goals to focus on. You’re better off knowing what you will have to do at the beginning rather than down the road if you find your progress stalling.
Schuler recommends starting with these questions.
- How much will it cost?
- Do I have the resources to fund this goal?
- What is my timeline?
- How important is this goal to me?
- Is there a way to cut corners (i.e. send a child to a state school instead of an Ivy League school)?
3. Determine What the Trade-Offs Will Be
No one has unlimited resources, so take a thorough look at your budget and spending habits. You may need to make sacrifices now to meet your goals later. Keep your eye on the prize and remember your long term goals.
“You might want to buy a nice car next year, but that might mean that your retirement goals need to be adjusted,” said Schuler.
4. Figure Out Your Risk Tolerance
Most investors create portfolios with only their risk tolerance in mind. While risk and goals are not mutually exclusive, risk is only one component of investing.
“To figure out the right asset allocation needed to achieve your goal, you’ll need to determine how much risk you can handle,” Schuler advised. “As an investor, you should take on the least amount of risk necessary to fund your goals.”
If you’re someone who has a long time horizon, you might be able to take on more risk than someone who is close to retirement and needs to tap their nest egg sooner.
5. Work With a Professional
Now that you know what your goals are and what you’re willing to give up to achieve them, it’s time to find a professional who can help get you across the finish line.
“Depending on your goal, you might need to work with multiple advisors to create a portfolio that’s designed with your objectives in mind,” Schuler said.
An advisor can help you pick investments that not only have a higher probability of generating competitive returns, but also are chosen because of their likelihood in helping you achieve your goals.
6. Schedule Time to Check On Your Progress
Investing isn’t a set-it-and-forget-it task, especially when you’re making decisions based on short- and long-term goals. Your priorities, circumstances and time horizon can and will change.
“By regularly returning to that original goal and checking in on how you’re doing, you can make adjustments as needed,” Schuler said. “Any number of things could happen. Your returns could be better or worse than you anticipated. Your goals could have changed. Perhaps you’re in a different position financially due to a raise or promotion, and you can dream bigger.”
For most people, an annual review will suffice, but depending on your time horizon and goal, the frequency might need to be different.
Learn how PNC can help you achieve your financial goals »
Feedback
