Goal-based investing: why it can work for you

If you’re new to investing and have a lot of financial goals that you want to accomplish, you might want to consider goal-based investing.

• What is goal-based investing?

Goal-based investing is a relatively new approach to wealth management that emphasizes investing with the objective of attaining specific financial life goals. When you invest this way, each of your investments has a purpose related to a goal, so that your financial goals are at the centre of  your investment strategy.

• Why do you invest?

Goal-based investing allows you to better understand why you are saving money, which can be especially motivating if you’re a goal-oriented person. If you are saving to  have a down payment for a house, for instance, picturing it could help you order less take-out food or cut back on your streaming services to meet your goal. If you’re saving for retirement, you may have a few years or decades, and then you can adjust your investment strategies accordingly. So, identifying your goals is the key starting point for you.

•  How does it work?

With goal-based investing, you don’t look at an investment portfolio as an account that is separate from your personal life. Instead, you think of each investment as having a single purpose. So, you could be saving for that house, saving for a child’s post-secondary education, saving for a boat, or even saving for investment. By identifying your different goals, you can then consider the timeline and risk level that you can adopt for each of them and how much money each goal requires for you to achieve it in your desired timeframe.

If you start investing to pay for your children’s post-secondary education when they’re born, for instance, you have much longer to meet your goals than if you start when they’re teens.

The same with retirement. If you start investing when you start working, you can assume more risk and earn more over your lifetime than if you wait until a decade before you want to quit working. The shorter time you have to meet goals, the more careful you need to be with your money. But, your advisor can help you work out what is the best plan for you.

This kind of investing differs from others because you measure your investment success against your goal rather than other performance benchmarks. You can also ensure that you maximize tax-efficient strategies for each goal to help you decide where to place your money.

You can also create a goal-based plan that provides a framework for using the most tax-efficient strategies when deciding where to place investments. When planning how to save for retirement, for instance, you could look at contributing money in your RRSP versus your spousal RRSP as they may be taxed at different levels that could help you meet your goal.

• What are the benefits of goal-based investing?

Using this strategy when you work with a financial advisor or financial planner can help them advise you in choosing the investment products that work best to meet your goals. That’s particularly important if you have a short timeframe or less risk tolerance because the more important the goal is to you, the less risk you may want to take with your money.

Financial planners can also use goal-based investing to help you avoid worrying about the short-term volatility that comes from having a higher risk investment portfolio. If you’re working toward a long-term goal, losing money in a particular month or quarter won’t seem as daunting as if you have two decades to save for a goal. So, when you’re investing with a larger, long-term goal in mind it’s easier to step back and look at the big picture and see where you can go in the long-term, which can help you stay at it for the long haul and not make the mistake of removing money from stocks or index funds that are dipping.

• What are the challenges of goal-based investing?

Goal-based investing can be helpful, but also challenging. It can be difficult to identify your financial goals, especially when you have to prioritize a variety of them that you want to tackle at different times in your life. It may also not be easy if you’re paying down a debt, such as a student loan or mortgage, and can’t invest all that you might like right now.

It can also be hard to prioritize what matters to you most, especially if you have several aspirations. But, defining your goals, estimating your needs, and mapping out your plan to meet  your goals with goal-based investing can be worth the time and effort you put into it, especially once you start to see some marked progress toward your goals.

• How should you start goal-based investing?

Before you start, take an inventory of your finances. Have you saved an emergency fund? Do you have a lot of debt to repay? Can you afford to lose money you invest? You should do an honest inventory of your income, expenses, and available investment funds before you start.

Then, map out the goals you want to achieve in your life. Work with your advisor to learn more about the different types of investments available and how much money you may need to start. You can also work with your advisor to build a diversified portfolio, which may contain, stocks, bonds, exchange-traded funds (ETFs), mutual funds or even assets like real estate. Your advisor can also help you balance those to withstand market tailwinds and maximize the chance that you’ll be able to meet all the financial goals you now have.