What Is Goal-Based Investing and How Does It Generate Wealth?

For those investors who wish to create wealth, especially over a long period, goal based investing comes to the fore as a comparatively fresh approach to the already-here wealth management strategy. The goal based investing approach takes a view of investing with the aim of attaining certain financial life goals. In the approach of goal based investing, a wealth manager may help investors to plan their investments in such a way as to meet specific life goals that inadvertently involve some degree of financial organisation. Life goals could be as varied as paying for a child’s further studies to going on an expensive world tour. Most individuals seek out goal based investing to build a retirement corpus and meet emergency expenses. 

What is the focus of goal based investing?

Instead of targeting ways to beat the markets or getting the highest possible returns for your portfolio, goal based investment focuses on a structured plan to meet your life goals over time. It is possible to grasp the concept of goal based investing when you compare it to traditional investing. The benchmark of success with regard to goal based investing is the ability of the investor to meet their unique financial life goals, relative to whether investments are performing against averages in the market at a certain time. 

To illustrate a case in point, consider any investor who wishes to retire within a year. Therefore, such an investor cannot afford a loss of even 10% of their portfolio. In the event the stock markets dive 30% in a year, and the said investor’s wealth drops to 20%, the truth of the matter is that the investor’s portfolio has beaten the markets by 10%. However, this  will be a scant consolation. What such an investor has to do is to focus on maintaining, not growing, wealth to reach their goals of having a retirement corpus within a year. 

The crux of goal based investing is that it re-frames investment success by targeting the investor’s goals and requirements. If a client wants to save for the eventuality of upcoming retirement, and pay for the cost of education of young grandchildren, whatever investment strategy is employed would be conservative for retirement, but aggressive for funding education. For instance, the allocation of assets to meet retirement goals would consist of 10% equities, and 90% fixed income. Contrastingly, the allocation of assets to fund education would be 50% equities and 50% fixed income instruments. The factors that drive investment decisions largely consist of requirements and goals, instead of the tolerance of risk. 

Goal Based Investing – Advantages

The two clear-cut advantages that goal based investment is prone to create are the following: Goal based investing creates a sense of discipline and commitment in investors, permitting them to participate in, and observe and evaluate, a tangible process. 

  • Rather than impulsive decision-making, goal based investing relies on a structured way to maintain your wealth, and grow it in a systematic and calculated way. 

How Goal Based Investment Creates Wealth

By now, you may have grasped how goal based investment can generate wealth for your future needs. However, the exact details may still have to be spelt out. Here is how goal based investment leads to the generation of wealth for any investor: 

  • Pick the Right Investment Products

With goal based investing, it is possible to choose the most appropriate investment products to match your distinct needs. When you have figured out the amount you may need and the time required to accumulate that capital, it’s easy to select a product that helps you do that. Depending on your future income needs, goal based investing can let you choose investment products linked with different asset classes like debt, gold, equity, etc. Different ways to allocate your capital to various assets and products helps you to generate the amounts you need with accuracy. 

  • Avoid Debt

In case you do not clearly define goals and save and invest accordingly, you stand to lose out and may end up in debt when you need capital in the future. Goal based investing lets you avoid situations in which you may find yourself taking a loan as you lack funds. 

  • Maintains a Balance in Finances

When all your investments are related to clear goals, you can re-evaluate your financial portfolio and give it a balance. Furthermore, with the generation of wealth through the right investments, you have the ability to regularly assess your financial portfolio and change it according to the way your assets and investments are performing. You can also generate wealth according to the needs to be met as you get closer to your goal. For instance, if you know what your goal is to build a retirement corpus, you can gradually veer away from equity-linked products to fixed income products closer to your retirement. Portfolio rebalancing is crucial to protecting your gains for the future. 

Mapping Your Wealth

The concept of goal based investing is easy to understand, and you can clearly carry out the process without a professional. In case you do need help, you can always contact an AMC and experts will be ready to evaluate your life goals with you so you can only win with your wealth. It’s never too late to start working on goal based investing so you should get going. 

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