How Financial Experts Use Goal-Based Investing

Everyone knows the primary purpose of investing. It is the accumulation and multiplication of money. But what exactly are you aiming for? Any financial expert will tell you that investing money and waiting for results is not enough. You must know what you are doing it for, what you are aspiring in.

So, Goal-Based Investing comes your way. It’s a new idea that will continue to grow in the asset management market. It has shown a high level of investor satisfaction after its application. 

So, what is Goal-Based Investing (GBI)?

It is an investment based on defining a specific goal to be achieved. It can be short-term (1-2 years), medium-term (up to 5 years), and long-term (over five years). For example, it was buying a car, a house, an apartment, education opportunities, and moving to another country.

To go in the right direction, you need to know the endpoint.

One can say the same about investments.

You need to define your goals and gradually follow a plan to avoid a chaotic result. You can eliminate impulsive decisions and increase your control over your money.

An investing base 

Both personal and borrowed funds can be used to invest.

At the same time, it is vital to bear in mind that the question of capital preservation and multiplication will have to consider the level of inflation and market fluctuations. You should add the loan interest to these figures if you borrow money.

The risks of using a loan are that it can become a debt funnel for you if the investment is unsuccessful. 

Also, when applying for loan funds, provide only truthful information about yourself and your income. Using fake pay stubs is a bad idea. Loan origination algorithms, among other things, are one of the indicators of your ability to pay.

If your solvency is falsified when you receive money, you will likely fail your investment and come close to bankruptcy.

Tasks for the financial expert.

There are several tasks the financial expert should explore.

Determine emotional risk-taking.

It is possible,  for example,  by preparing and inviting the client to fill out a questionnaire with queries and examples.

It is necessary to demonstrate to the future investor what problems or losses he may face in the short or long term.

The risk profile of the investment product selected in the future (also called «suitability») should be close to the investor’s risk profile.

You should also set investment priorities between the discretionary and non-discretionary nature of the goals.  

It is also possible to illustrate the risks as possible scenarios. That will allow an expert to relate the client’s desires to his abilities more realistically.

Develop an individual financial plan.

We need a detailed step-by-step plan to enter the investment market. It will help formulate short-term goals, purposes, and problems you may experience.

We should define a list of priority goals and the current level of funding to establish a plan.

The investor must determine, independently or with the help of a financial expert, how much time he has to achieve one or more of the objectives. Therefore, it will be possible to determine from this information how much he can invest based on the risks.

The planning process will help you calculate the necessary start-up capital, considering possible risks.

Assistance in investment decision-making

This assistance may also consist in the development of a long-term portfolio strategy. It is a mandatory element of targeted investment, as objectives and risks are usually kept for several periods.

Unforeseen circumstances such as an economic crisis, war, or epidemic will affect the outcome of your investment. The financial expert should help cope with the decline in liquidity and return on investment by formulating a new economic strategy.

I suggest you consider an example of a possible strategy.

Goal: I wish to save for education opportunities for my child. The capital will be used to pay for college tuition fees on a fixed date. It is desirable to gradually transfer to a cash portfolio to minimize the downside risk of not being able to pay. The strategy here is a stepwise reduction of risky asset classes to cash. 

We should also consider possible periodic withdrawals for non-priority purposes here. It can be gifts, buying art objects, or expensive jewelry.

It would be best if you carried the strategy under review. Based on a new assessment of the strategy’s effectiveness and the probability of achieving the objective, the level of risk may change.

As you approach the investment completion date, you can see that the results cannot meet the client’s expectations. But the goals of the investor can also change.

Investment Products.

Depending on the objectives, you need to choose a suitable investment product. It applies to the possibility of participating in various mutual funds.

So, if your goal is to travel for the next two years, that goal is urgent. It can only be achieved through participation in debt funds and term deposits.

Medium-term objectives (e.g., purchase of a new vehicle) will be achieved through participation in hybrid funds. They allow you to combine the potential of capital and debt successfully. At the same time, you are strong to change or fall in the market. 

Equity funds should be considered only for long-term investments, where the ultimate goal is to maximize the amount of invested money.

The choice of a mutual fund may also depend on the investment style, which may be conservative, medium, or aggressive.

The investor should sufficiently assess the possible level of income from each asset class and refill the investment if possible with increased returns.

A common mistake is, for example, choosing the wrong investment product, which does not relate to the term and purpose of the investment. For instance, it would be wrong to allocate money by purchasing shares if the aim was to buy a car.

To sum up

 The collection of customer information is key to developing an investment strategy.

The critical task for the financial experts is to gain the maximum probability of achieving the desired results for the client by implementing unique investment solutions. It would help if you reached the desired goals with minimum well-being for the fundamental purposes of life. It is inadmissible to violate the priority of desires. 

The main goals should be well protected even in the case of poor market conditions. 

This goal can be achieved by:

  • adequate determination of the customer’s risk profile, 
  • an adaptation of the investment period to the selected investment product, and 
  • constant adjustment of investment strategy due to changes in the market and personal conditions.