Goals-based investing is an alternative approach to asset allocation typically used within the wealth management Arena.
The main aim of the asset allocation approach is to set up portfolios for clients with the specific aims and aspirations or goals of the client in mind rather than just trying to earn the highest risk adjusted return.
A client may have a number of different goals. They wish to achieve and the goals based investing approach aims to meet all of these different goals for our client.
The specific aims and aspirations of a client need to be Quantified in terms of the time Horizon within which the returns need to be earned and the degree of certainty.
Or probability that the client has regarding the need for achieving that goal. For example, an investor may desire a higher degree of certainty for the returns in their retirement portfolio, which will be used to meet their spending costs during retirement than for an investment portfolio to be used for a luxury item such as a yacht.
This will result in the funds for retirement being invested in a lower risk and return profile fund than for the money invested for the yacht.
The asset allocation decisions are made with the risk of underperformance of primary importance.
The aim of this approach is to minimize the risk of not achieving the desired goal.
As a result as allocation decisions.
Are based on the expected Return of the portfolio under poor market conditions? Wealth managers typically have a range of different predefined portfolios available for clients to invest in to meet their different goals.
The expected worst case outcome under different probability ranges will have been modeled by the wealth manager over different time Horizons. So for example, a wealth manager might have a five-year time Horizon and a 10 year time Horizon.
And for a range of different portfolios under those time Horizons, they will have modeled the worst case outcome 85% the time and maybe 95% of the time as well.
With the 95% worst case outcome more relevant for the investor with the higher degree of certainty required. This will give us the worst case outcome 95% of the time giving us a smaller probability of underperforming against this worst case outcome 95% of the time.
