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Goals Based Investing

Posted on: May 25, 2021

Goals-based investing helps you make investment decisions according to your unique and personal circumstances. It fosters a view that promotes a long-term perspective to investing. Instead of concentrating on performance relative to a benchmark, goals-based investing is structured around you as an investor and your personal objectives.

Goals-based investing matches an investment strategy to each specific goal that you are attempting to achieve. Risk is not viewed in relation to a market benchmark but in the success or failure to attain each goal.

This approach focuses on specific objectives and provides multiple benefits including addressing irrational behavior by investors.

Many investors often make decisions based on emotion and short-term market fluctuations. Modern behavioral finance has identified certain biases to which investors are most susceptible. These include:
  • Confirmation bias – Occurs when people seek out information to confirm their existing opinions while disregarding potentially useful information because it doesn’t align with their preconceived ideas; causing investors to make less-than-optimal choices.
Example: An investor hears that a company is on the verge of declaring bankruptcy. Based on this information, the investor considers selling the stock. When they go online to read the latest news about the company, they only read the stories that confirm the likely bankruptcy scenario and miss a story about a new product the company has just launched that is expected to perform well and increase sales. Instead of holding the stock, the investor sells it at a substantial loss just before it turns around and climbs to an all-time high. The investor went online simply to confirm the bankruptcy information that they heard was correct and missed the other news as a result.
  • Loss aversion bias – Relates to the tendency to strongly prefer avoiding losses than to achieving gains; as such, investors will base their decisions on perceived gains rather than perceived losses.
  • Regret aversion bias – Investors who reject the fact that they’ve made a poor decision, in order to avoid the unpleasant feelings associated with that decision; in turn, causing them to stick with their decision, which can make the outcome from those decisions worse.
Example: An investor owns shares of a company in which there has been a material change in the business landscape. Even though the company has underperformed and it seems as though it will continue to underperform, they do not sell their stocks as they do not want to admit they have made a poor decision to purchase the stock in the first place.
  • Overconfidence – When investors overestimate their abilities or accuracy of their predictions, causing them to underestimate risks and exaggerate their ability to control events.
Concentrating on your goals helps mitigate these behaviours. The focus is not on panic selling in a down market or the purchase of a “hot stock,” but on a long-term commitment to your identified life goals.

Another benefit to this approach is that by tracking each goal separately, it will give you a much better picture as to how you are succeeding relative to each of the goals you’ve identified.

For example, you will know if you are on plan to having enough funds to pay for your children’s education, or a vacation property, each of which forms one of the goals identified.

By incorporating a goals-based investment philosophy with your Investment Advisor to construct your portfolio, you can focus on long-term investment success, reduce behavioral biases and increase commitment to your life goals; while relying less on discussions focused only on results against an irrelevant benchmark.

Ultimately, implementing a disciplined approach with your personal and unique goals at the forefront should provide you with the confidence that you and your advisor can structure a portfolio and investment plan that will assist you in attaining your goals, whatever they may be.