Let’s get back to goals-based investing

By Brad Herdt

I was sitting with a financially healthy, young couple not long ago, when one of them asked, “How can we get started with investing?”

This is not an uncommon question. In the era of meme stocks and personal finance influencers, it seems like everyone is investing in something these days—and if you’re not, you’re behind.
I smiled and said “That’s a great question. Tell me, though, why do you want to invest?”

They looked at me dumbfounded, as if I was a doctor asking a patient why she wanted to eat more vegetables or exercise more regularly. Perhaps they were expecting a response about ETFs versus mutual funds, dollar cost averaging, or even Roth IRAs.

While the internet has many resources for learning how to invest, the bottom line is young people seem to not understand why investing matters. Some seem to think investing is a form of status symbol or a financial wellbeing milestone.

Such couldn’t be further from the truth!

We need to get back to goals-based investing, both in our marketing and our client meetings, to combat the firehose of interesting—but actionless—financial trivia.

What is goals-based investing?

Simply put, goals-based investing does to your savings what zero-based budgeting does to your spending: It gives every dollar a job. A goals-based investor can tell you what goal any specific account in their portfolio is for; when they will use the money; and connect the many nuances of account types, asset allocations, and contribution rates back to their personal priorities.

While this may seem elementary to some, it’s a critical emphasis that is too easy to lose sight of.

As we learn more about markets, investments, products, tax rules, and portfolio theories in our careers, the simplicity of identifying and setting goals can become a secondary concern (as research has found). We become so excited to show how much we know about planning that we overlook—and sometimes outright ignore—the goal.

Pause for a minute and consider some of the many evidence-based benefits of simply emphasizing goals when discussing investments:

• Conversations come more naturally: Focusing on client goals can help you know how to start (or handle) the conversation and ask better questions.

• It implements behavioral finance principles: Goals-based investing leverages the incredible power of mental accounting to help savers focus on the purpose of setting money aside. This helps frame the definition of success not as (irrelative) relative returns, but with attainment of real-life, personal goals.

• Asset allocation becomes intuitive: A focus on goals makes identifying investment time horizons a natural part of investing, which in turn simplifies the identification of optimal allocation strategies.

Implementing goals-based investing

To start, clients can begin goals-based investing in under 10 minutes:

1. List all your goals on a sheet of paper. Each member of a couple should do this separately.
2. Number the goals in term of priority. At this point, a couple should come together to reconcile lists.
3. Working with the three highest priority goals to start, decide how much the goal would cost in today’s dollars.
4. Decide when you would like to realize this goal.
5. Share this paper with your financial planner.

Then, as a planner, you can then leverage this simple exercise in a follow-up meeting to help clients understand:

1. The impact of a relevant inflation assumption on the goal’s future cost.
2. What lump sum or periodic contributions would be needed to reach the goal’s future cost.
3. The impact of trade-offs and commitment in setting and reaching multiple goals.
4. The pros and cons of relevant account types for a given goal.
5. The appropriateness of cash, bonds and stocks for the goal’s time horizon, including when allocation may need to change.

Finally, we ought to tailor our marketing communications about investments to de-emphasize solutions and elevate goals. We can’t simply contribute to the endless list of internet investment factoids, but instead ought to advocate the higher purpose of—and superior approach to—learning how to invest.

'This makes so much more sense'

Goals-based investing is a powerful tool and mindset for planners and clients alike. It cuts through the internet noise of investing for investing’s sake and helps us return to an essential reason clients engage financial planners in the first place: to help them obtain a sense of financial security. Focusing on, working towards and attaining goals can build that sense of security and fulfillment.

The couple I mentioned earlier looked at each other at the end of our conversation, and with a sigh reflected, “This makes so much more sense than what we’ve been seeing online.”

As you implement and advocate goals-based investing, you will find—as I have—that clients gravitate to its simplicity and wisdom.

Brad is a Financial Planner and Strategic Technology Lead at Deseret Mutual Benefit Administrators (DMBA), serving employees of the Church of Jesus Christ of Latter-day Saints and its affiliated organizations. Connect with him on LinkedIn.