Is your investment centred around an overall goal? What are you aiming for with your investments?
When it comes to your wealth, there are multiple ways by which you can secure your financial freedom.
The truth is, basing your wealth solely on a savings plan will only get you so far. The most tried and true method for asset accumulation is investing. And investment comes in all shapes and sizes.
Let’s focus our attention on goals-based investment a method practised nowadays by so many individuals. We will take a look at some of the goals-based investment characteristics and an example to clarify this concept.
What is goals-based investing?
Goals-based investing is also referred to as objectives-based investing, or goal driven investing.
It is a method of assigning investment assets that target a certain investment return in order to achieve a particular goal. This goal could be a house purchase or retirement.
It still involves establishing your risk tolerance, but the focus of goal-based investing lies in determining your specific financial goals and objectives.
Tip: Once you’ve clearly determined your goals, work with your financial advisor to create an investment portfolio that will help you achieve your financial goals and objectives.
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Why should you take goals-based investing into consideration?
Everyone wants to get investment returns. Creating a clear connection between your investment return and your financial goals makes your return so much more meaningful.
Attaching meaning to your wealth accumulation process will help you keep your motivation levels high. It will also humanise the process, making it less about the money and more about achieving your goal.
Make a habit to come back and evaluate your financial goals and your investment portfolio. Your financial goals might change over time, therefore so should your investment approach and practices.
How does goals-based investing look like?
Now, let’s take Gina and Harry, a couple who wants to prepare their retirement planning ahead of time. Below is how their goal-based investing model applies to their retirement planning…
PHASE 1 – Accumulation
Gina and Harry’s goal is to have a comfortable retirement lifestyle. According to ASFA Retirement Standards, a comfortable retirement allows an older, healthy retiree to:
- Be involved in a wide range of leisure and recreational activities
- To have a good standard of living by investing in things such as:
Private health insurance
A reasonable car, good clothes
A range of electronic equipment
Domestic and occasionally international holiday travel
A comfortable retirement requires an annual income of $59,808. After discussing this with their financial adviser, Gina and Harry will need to come up with a complete financial plan that will take into considerations things like:
- Their current assets and liabilities
- Gina and Harry’s ability to save
- The period of time in which to achieve their financial goal and the risk tolerance.
If they (the financial adviser in collaboration with the couple) decide the goal is achievable within an acceptable level of risk, the financial adviser can go ahead to build an investment portfolio.
The investment portfolio will include targeted investment returns that aim to help them in achieving their financial goal.
PHASE 2 – Pension
When Gina and Harry reach their retirement age, they will enter the pension phase of their retirement planning.
Their investment portfolio will need some adjustments, which may include:
- Reducing exposure to growth assets
- Increasing exposure to income-producing assets
- Choosing the three-bucket approach.
Goals-based investing in the pension phase may also include a few more goals to the investment portfolio, such as:
- Goal: Safety
Achieved by: precautionary savings.
- Goal: Essential Income
Achieved by: funding for day to day living.
- Goal: Lifestyle
Achieved by: funding for discretionary spending associated to a more active retirement.
- Goal: Future
Achieved by: funding to create a heritage or to meet aged care and medical expenses.
[ctt template=”7″ link=”fwB94″ via=”no” ]Tip: Make sure your investment portfolio gets updated when you reach your pension stage. Your portfolio should be updated so that it supports and sustains all your current financial goals.[/ctt]
Goals-based investing in a nutshell…
A goals-based investing method allows you to clearly keep track on your financial goals and their achievement process.
Each financial analysis should help you understand and measure the performance of your investment portfolio in relation to your financial goals.
Tip: Keep in mind that goals-based investing isn’t limited to your retirement planning only.
Another important thing is making sure you get the best financial advice you can get. The financial and wealth specialists at Shuriken Consulting are ready to assist you in determining the right approach to your wealth or retirement planning. Get in touch today.