What are Your Investment Goals?

When you invest, you make an important choice not to spend money today so that you can live better in the future, or realize your goal.  Doing so, means that we have a goal or a reason to invest in the first place; if we don’t what’s the purpose of investing? 

Building an investment strategy means that you need to first begin with a goal.  Individual investors are not institutions.  We have a limited time horizon, we pay taxes, we may react emotionally to market volatility.  Building portfolios for individuals should be different. 

Goal setting should begin with comprehensive financial planning, including individual’s risk tolerance, time frame, resulting in an asset allocation that fits these factors and client’s goal.  What is the purpose of these investments?  How much is the future spending goal, and how much is the future spending goals, and how much risk is the investor willing to take that they either achieve their goal or fail to meet their goal. 

The Spending Goal 

Goal-based investing assumes that the spending goal will drive the investment strategy.  You, an investor you can be relatively risk tolerant, but if your spending goal is not flexible (for example, medical spending or living expenses in retirement) then your investment portfolio should reflect the inflexibility of your future goal.  And the investments selected today to meet that future goal should be those that offer the highest expected after-tax payout considering the amount of flexibility you are willing to accept. 

Goals are tricky because they are often a fixed amount (say, $1 or $2 million for retirement), but they must be funded with investments with unknown future returns (market history while an indicator is not guaranteed).  High investment returns mean the goal is more easily funded.  Low returns mean that an investment plan can be derailed, or the plan may need revising by increasing annual savings, or other corrective action needs to be taken.  Ongoing tracking of the growth of an investment portfolio is a key factor to realize a successful investment plan. 

Remember, your spending goal is always in after-tax dollars.  And $2 million in an IRA Rollover account or a 401(k) account is not the same as $2 million in after tax dollars.  If all goals are after-tax, optimum distribution means choosing and planning for the lowest amount of tax due when applying dollars toward your spending goal. 

Realism and Risk 

What does it means when investment returns don’t measure up to expectations?  With a goal-based planning philosophy, it means that you, the investor, may fail to meet your goal---unless you take some sort of corrective action. 

We believe that a goal-based investing process helps investors understand how they are making progress toward their goal and then gives the investor, you, the tools needed to make the right corrections along the way. 

This means working with you, the client, to set realistic goals with a defined time horizon and an acceptable level of risk. 

Establishing an acceptable level of client risk is a balancing process, using statistics, probabilities and the comfort level with the amount of downside risk.  With market history suggesting that a balanced U. S. stock-bond portfolio, over a ten year period averages 7.4% (S&P 500 Index average of 10 year periods), this return may or may not result in the successful attainment of a specific goal.  It is a starting point to consider less risk or more risk.   

Flexibility is a key factor to establish goals.  Meaning that if you, the client, is unable to handle the amount of risk necessary to attain a specific fixed goal, then perhaps other remedies need to be considered, like working longer, saving more, or reducing retirement lifestyle living expenses. 

Course Corrections 

Tracking investment progress toward a goal, with annual portfolio evaluation, is akin to traveling with Google Maps.  Google will provide the best directions at the time that you leave.  However, traffic or road conditions may change along the way, requiring you to make a course correction. 

In doing your investment planning you typically make market assumptions based upon market history.  Doing so may mean that there is (at least) a 50% chance that you will fail to achieve your goal.  This is a normal statistical distribution.  Half of the investment results will rise above the long-term market average and half will fall below. 

Many economists are projecting 21^st century investment returns that are significantly less then20^th century investment returns.  So, using 2oth century return projections may result in a higher failure of achieving a given goal.  The remedy is regular tracking and perhaps more course corrections. 

If on the hand, you find yourself moving toward an 80% to 90% probability of successfully meeting your goal, you may be able to lower your level of market risk. 

Conclusion 

Goal-based financial planning involves a life long journey of following a financial plan (your road map) through both the years of your life when you accumulate money towards your goal and through your retirement years when you are spending to sustain your retirement lifestyle. 

Closing 

We thank you for your continued trust and loyalty, and the opportunity to serve you and your families. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Blog No. 119 – What are Your Investment Goals 

Sources: LPL Financial Research, Think  Advisor, Wade Pfau of the American College in Journal of Financial Planning, Merrill Lynch study on goal-based planning and S&P 500 Indices.

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