Monday, November 21, 2016

Goals Based Investing - What Is It & Why You Should Be Using It

Today I wanted to discuss a topic that I feel very strongly about and one that I do not believe enough advisors are offering their clients - Goals Based Investing or GBI for reference purposes.

Remember when you were young and that new had-to-have item came out but your parents told you it was too expensive and you'd have to save your own money to buy it? I take my clients through a similar process during our initial meeting discussing their goals and aspirations. Too often I see advisors wanting to categorize their clients as a 60/40, 80/20, or 50/50 model (stocks/bonds ratio) but the problem is this is an archaic method of determining a clients' needs. Which is why I've chosen to establish goals first, and then offer an investment recommendation (if any) last.

Typically people have 3 or 4 goals or buckets of money that are of utmost importance to them. These include, but are not limited to; an emergency fund, retirement fund, down payment fund, college fund, vacation fund etc. The idea behind utilizing this approach as opposed to grouping all of your assets into one large portfolio is that it allows us to set different risk tolerances for different goals. Instead of looking at all your investments as one large account we separate them into different goals and address each on a case by case basis.

Furthermore, this new investing style is not concerned with benchmarks. What relevance will it have on your life if you're able to say that your investments outperformed the S&P 500 75% of the time? None. However, what will have relevance to your life is the security of knowing you'll be able to put your kids through college, fund the retirement lifestyle that you desire, or be able to purchase that new home you've been investing for. Those are real-life goals that will be measured in terms of how close you are to achieving that goal and not an arbitrary benchmark with no significance to your situation.

Model portfolio allocations are ancient and don't address the things that investors care most about. Investing for a specific purpose and seeing how close you are to achieving each goal is a far more efficient style. Always be sure to work with someone who listens to your goals and then creates an action plan to reach them.

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary.

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