Gains in goal-based investing

September 2016

There can be great satisfaction in defining your objectives and focusing your wealth on achieving them.

Investing to achieve specific goals, and not just ‘beat the market’, is becoming popular, writes Eva Diaz.

Why do we invest? Some investors treat it as a race against the sharemarket, eyeing off the performance of their chosen stocks against the rest. But increasingly, investors are dropping out of that race and investing for their own reasons, with their own objectives, to meet their own needs.

Daily financial news focuses on the performance of sharemarket “benchmarks”. The S&P/ASX 200 or the S&P 500 indices are good examples – these lists of top stocks are widely cited and many investors measure their success or failure by whether they “beat the benchmark”. But the benchmark doesn’t care about your holiday next year, the payments on your house or the education of your children.

Outperforming a benchmark does not necessarily mean an investor is achieving the results they set out to achieve with their investment. That’s why goal-based investing, with its focus on meeting specific goals, is finding favour among investors.

With goal-based investing, success is based on investors meeting their objectives. It focuses on funding personal financial goals rather than just higher investment returns relative to an index of stocks.

Goals can include buying a new car, saving for a first home or sending children to an exclusive school.

According to ANZ Wealth head of advice transformation Adrian Kwa, goal-based investing is a more focused method of investing and one that directly addresses investors’ most important issues and objectives.

“Usually, investors have several goals. They have short-term and long-term goals which represent the most important things in their lives.”

Kwa says each goal can be used to guide investments. An investor might create different investments for different types of investment outcomes. For example, an overall investment portfolio may have several “mini” portfolios within it that focus on specific goals.

‘The objective is not to beat the market’

“For example, if one of the goals is to save up for school fees within one to two years, then a certain percentage of the portfolio can be allocated to that,” says Kwa.

He adds that goal-based investing has been around for about 15 years but has started to get more attention from advisers and investors in the past year. Investors have been slow to take up this investment method as the market is dominated by the use of benchmarks (rather than goals) to measure investment performance against.

“But if you look at it, goal-based investing is a much more logical and practical method of investing as it addresses all the psychological, behavioural and financial needs of investors,” says Kwa.

Head of State Street Global Advisors’ investment solutions group, Mark Wills, agrees, identifying two periods in an investment journey – accumulation and retirement – that distinctly highlight goal-based investing.

During the accumulation phase, an investor who is starting to build an investment portfolio may set a specific dollar figure they want to reach by a certain time. According to Wills most people would like to make as much money as possible during the accumulation period.

During the retirement phase, the goal is to have enough savings to sustain a certain level of lifestyle. Investors entering this stage should be more focused on the end goal or attaining a specific level of income.

Wills says investors should keep their focus on their goals: their primary concern should be on generating the financial return they want. The objective is not to beat the market or the index, but to meet that specific investment goal, which is to generate $80,000 every year.

“Once in retirement and when people are not getting any income from work anymore, they need to protect their savings and this is an important period for goal-based investing. People need to make sure that their investment will last and will meet their needs.”

Banish the benchmark

Wills says, in contrast, some investors are distracted by comparing investment returns to an index or a benchmark.

“[They] are just scoreboards. People should care more about whether their investment objectives are being met or not,” he adds.

At the same time, Wills highlights the need for carefully choosing assets based on investors’ long-term objectives. “As an investor you want your wealth to last as long as possible. The idea is to grow the portfolio’s longevity.”