Brian Perry
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In addition to overseeing Pure’s investment offering and platform, Brian works closely with Pure’s financial advisors, helping provide them with the tools and resources necessary to serve their clients and continue the firm’s mission of providing the highest quality financial education and planning to as many people as possible. He has been actively involved in [...]

Published On
February 23, 2018

You may be interested in how money is managed, either from a desire to do so or just out of curiosity. What exactly is a successful outcome? Goals based investing is a fascinating subject that is affected by so many other factors in the world.

Perhaps you’ve purchased a book by a leading and respected money manager or listened to several different noted investment professionals give their opinions on investing strategies in general. It may, however, be worth noting that successful investment professionals often have goals that may seem abstract to the individual investor, namely that of beating their benchmark. Goals based investing means that the professional may be successful if he or she produces results based on the standard “measuring stick” to which they are most likely compared. For example, a general stock equities manager might use a stock market index such as the S&P 500 as their measuring stick.

An investment manager may be slightly down in a year that the market is down substantially and still be considered to have done well for the year. This makes sense in part because the goals of many investment managers are indefinite regarding time. A mutual fund or hedge fund lasts until it closes. It doesn’t need to send children to school in 15 years. A university endowment theoretically exists in perpetuity. The university will not retire. This does not mean that a university endowment can’t be managed toward specific goals such as income to fund operations. It simply means that the goals of a university or other institution may differ substantially from an individual.

Consider the implications of this situation. The professional tasked with getting a favorable return relative to their benchmark may not need to manage to time or liquidity needs to the same degree that an individual retail investor does. An investment with little liquidity may still be selected if the expected return is favorable. Similarly, a professional investor managing for return may be less concerned with the negative returns of a single year (so long as favorable relative to their benchmark) since the time frame in indefinite. On the other hand, an individual investor who happens to retire just before the year of a large market downturn may not necessarily be pleased that he is doing ok “relative to the market.”

After 2008, many investors have reconsidered the importance of investing toward specific goals. They have experienced or seen others experience the effects of a single year and have considered making investment decisions that are more likely to accomplish specific objectives. This process, known as Goals Based Investing (“GBI”) or Goals Driven Investing may be worth considering as a way to increase your likelihood of accomplishing certain financial objectives.

What is Goals Based Investing?

Goals based investing, put simply, is making investment decisions to achieve certain life goals rather than another objective such as outperforming a benchmark.

How does GBI Compare to Other Strategies?

The main difference is how progress is measured. Are we getting closer to our life goals or not? Am I able to retire? Are my children able to afford college? While certain other traditional types of investment strategies measure progress relative to a benchmark, it is certainly not the only other possibility. Many investment managers hope to achieve an absolute rate of return annually independent of a benchmark. Both methods of comparison ignore the goals of the client.

Common Goals

Saving for An Emergency is an excellent example because it demonstrates a financial goal that has very little or perhaps no expected return. (Interest rates in the recent past for savings accounts have been very low or in some cases nonexistent.) By establishing an emergency fund, you are making sure you have enough liquid savings to deal with an unexpected expense. You recognize that returns may be better for other uses of the money but will put aside a certain amount (6 months of expenses, for example) of emergency savings because liquidity is a greater concern for that specific balance.

Planning for Retirement is a top financial priority for many. Your investments decisions may be affected by several other factors such as current or anticipated tax rates, your expected income from social security and the age at which you would like to retire or reduce the amount you choose to work. Your measurement of success is your ability to afford the lifestyle you planned.

Since you will likely need to plan for retirement over your entire life, it is likely that the specific investment strategies employed will shift over time. This can include short-term rebalances to your portfolio as well as long-term gradual shifts in the amount of risk being taken, usually toward more conservative portfolios over time. At each step along the way as you evaluate the account’s performance, you’ll be less concerned with the returns as abstractions but what they represent to you regarding your ability to comfortably retire.

Saving for College is a popular goal for many parents.  This is a good example of a financial goal that can be accomplished in several ways. Parents can take penalty-free withdrawals from their retirement accounts, open 529 or Coverdell College Savings accounts, use interest from Series I or EE Savings bonds tax-free for education purposes, or simply pay out of cash savings directly. Which of these strategies is the most likely to succeed? That, as usual, will depend on individual circumstances, but the general goal of funding a child’s college will be our measurement of success.

Caring for Parents or Others is a common goal for many. Perhaps parents are attaining an age where greater assistance is needed. Provisions may need to be made for a child or other relative with special needs. The approach to each of these situations will be highly unique and may be approached differently on a case by case basis depending on several factors. How much, if any are the individuals receiving assistance able to contribute themselves? What are the tax implications for both parties? Are certain federal benefits available based on balances in the name of the party receiving assistance? If so, are there other more efficient ways to title assets? Do certain types of income received from investments count toward income thresholds for any benefits?

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Leaving a Legacy is a common goal for many, especially if they have attained a level of wealth that is multigenerational. It is very common for someone to want to contribute to their alma mater to give back for their positive experience while attending and life-long impact of their studies afterward. Similarly, those who have experienced a disease often contribute to charitable causes dealing with its treatment, prevention or potential future eradication. Many donors have a wide variety of charitable interests based on issues they may or may not be personally affected by. The desire to leave a legacy and potentially make a positive impact on the world one is leaving is very strong in many, but how does one accomplish this task in the most efficient way and how would this differ from any other investment goal?

It may come as a surprise to some how many choices there are for the charitably inclined. There are numerous textbooks and college courses devoted exclusively to this topic. Some donors wish to give during their life, some after. Some have specific tax objectives for themselves or their estate. Some gifts are restricted while others are unrestricted. (A named scholarship to a university, for example, as opposed to a gift to their general fund.) There are almost as many possible ways to give as there are donors. How you choose to do so and at what point during or after your life you wish your gift to occur can have a substantial impact on the types of investments that may be used to help meet your charitable objectives.

Saving for a Home is an interesting example. Depending on when you wish to purchase the property, and if you will use financing or purchase outright and how much you will need, this may either be an investment goal or a goal of savings.

Someone who plans to purchase with an FHA or VA loan with low or no down payment requirement on a modest property may simply wish to save additional cash reserves and pay down debts that affect their credit score rather than prioritizing additional investment prior to completing their purchase. Those who will be utilizing conventional financing or purchasing outright at a point somewhere in the future may be less likely to forego a return of any kind on the balances they are saving, opting instead to choose those which are appropriate for their specific timeframe and level of risk.

There are so many different strategies for purchasing a primary residence (before even getting into any discussion of vacation or investment properties) that everyone’s situation will be unique. Your time-frame, current financial situation, type of property desired and many other factors may affect your investment decisions leading up to your home purchase.

Types of Goals

As you can see from just the list thus far, there are a variety of goals that can affect investment and financial decisions in general. Sometimes it can be useful to look at your goals based on the timeframe (near term, intermediate term, and short-term, for example) as well as by priority. Which are needs and which are wants? Within those needs and wants, which are of a higher priority?

Consider two competing priorities, saving for a child’s college education vs saving for your own retirement. If you’re 40 years old and your child is 10, you have objectives that differ in a couple ways. First, there is the timeframe. You may retire in 25 years while your child will attend college immediately after high school in 8 years. You have an intermediate goal and a long-term goal. What are the priorities of each of those goals? Although there is no clear consensus on this topic, many believe that parents should prioritize their own retirement needs before saving for college, often using the analogy of placing your own air mask on during an emergency before attempting to help others.

While everyone’s individual situation will determine the best course of action for them, it is an interesting example because the temptation would be to address the nearest priority, not necessarily the highest. As with many financial aspects, your challenges will not be simply to meet objectives but to balance and prioritize sometimes competing objectives.

Considerations/How do I Implement?

After recognizing the potential advantages of goal based investing, many wonder how they can implement this strategy. There are several aspects to consider. One must initially be aware of what their goals are. Do you wish to help with your child’s education expenses or build a greater estate that they may benefit from later in life? These can be challenging questions for some but deciding what you would like to occur is a necessary first step before implementation.

Taking a realistic inventory of your current financial situation will also allow you to gain insight into how much work is to be done and what options there may be going forward. Comparing diverse options that are available within the context of one’s current situation can then occur. Be careful not to overlook some parts of the decision-making process. To use a common example, some investors spend a considerable amount of time evaluating the specific investments they will purchase but little time to deciding how they should be held among various account types. Not only do different account types often have different tax consequences, but the simple act of using an account for a specific purpose has a psychological advantage in keeping us on track.

Consider an anecdote involving no investments at all. You hope to save $1,000 toward Christmas presents. First, imagine an account you have opened for that specific purpose early in the year. Perhaps you will put $250 from each quarterly bonus into the account. Now imagine that you do not open a separate account but instead attempt to maintain the same goal as a minimum balance in your general checking account that you also perform your other standard transactions in. It’s obvious to most that the second option is much more difficult.

Last is the ongoing task of monitoring your progress toward the goal over time. You may need to contribute more, invest differently, or take other actions as monitor results over time. Some investors will comfortable with all steps of this process but some may upon considering all of the moving parts involved determine they may need assistance with planning, implementation or both.

Consider a Professional

You may wish to consider working with a qualified professional to address the investment implications of your life goals. This can allow you to focus on the result of what you and your family hope to accomplish personally. Working with a dedicated professional may allow you to efficiently address all your goals within the context of your overall financial plan while also prioritizing those goals most important to you.

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