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What is the difference between goal-based investing and the traditional method of investing? Is one better than the other?


Investment performance is usually measured against a particular benchmark. If a financial advisor or asset manager puts together a portfolio that produces a long-term return greater than that of a widely followed index of stocks or bonds, or some mix of the two, then it’s regarded as a success. Sometimes the comparison accounts for different levels of volatility in the portfolio and the yardstick against which it is being judged. If the portfolio suffers wider swings than the benchmark, then some nifty math is used to nudge down the returns to compensate for the greater risk that the investor entails. No matter what calculations are made, however, the investor’s wants and needs are more or less beside the point. The portfolio earns what it earns, and the investor makes the best of it.

Goal-based investing reverses the thinking process. A financial advisor will sit down with a client, assess his or her needs for some long-term purpose, usually living comfortably in retirement or perhaps saving for a house or children’s education, and create a portfolio designed to meet those needs. It will also take into account the client’s family and other personal circumstances and such aspects as tolerance for risk. Goal-based investing also treats a portfolio as part of a whole, factoring in other investment or savings vehicles that the client may have.

Whether this approach is better than conventional financial planning is anybody’s guess. Goal-based investing sounds good in theory, but there is something to be said for earning the best possible risk-adjusted return, too, and no matter how well an approach is tailored to an investor’s needs, the markets may not oblige. Many investors may have sat down with their financial advisors to craft the perfect strategy based on their needs and goals, but if one goal was to retire two years ago, which coincided with the bottom of a great bear market, there’s a good chance that they didn’t meet it.

-Conrad de Aenlle