Back

Goal-based investing

Lesson in Course: Investing basics (beginner, 3min)

It’s easy to get off-track without a map. So how do we invest without getting lost?

Eureka!

What it's about: Goal-based investing is about investing to meet our needs, rather than focusing on trying to get the highest possible return.

Why it's important: Goals give our decisions and investments direction and purpose.

Key takeaway: There aren't objectively "good" or "bad" investments. The "best" is the one that gives us the highest chance of achieving our objective.

Like any good trip, we need to know where we’re going before figuring out how we’re going to get there.

What is Goal-based investing?

When we invest in the financial markets to fund specific objectives instead of trying to generate the highest possible return. 

Investing this way helps us meet our needs, live the lifestyle we want, and reach our highest aspirations.

Dangers of winging it

Without goals, our investment decisions are aimless, and we’re more likely to be disappointed by unrealistic expectations of what investing is or what it can do. 

Unrealistic expectations lead to excessive risk and loss

We’ll also be more likely to make rash decisions, causing mistakes that can set us back significantly. 

The benefits of goal-based investing
  • Since the outcome is something tangible to strive for, financial goals give us a direction and purpose, making it easier to stick to a budget and stay focused on the long-term. 
  • Our goals are important, so they provide the inspiration and motivation needed to stay disciplined as investors.
  • Having goals keeps us accountable to ourselves or others for our progress, ensuring we remain on track.
  • Goals give us something to celebrate! We’ve accomplished something great when we hit significant milestones or have reached our destination.

Understanding tradeoffs

There isn’t one ideal strategy for investing, and there isn’t a perfect investment either. 

Every strategy has tradeoffs

One isn't better than the other, and there aren’t objectively “good” or “bad” investments. They all have their advantages and disadvantages, making it difficult to make investment decisions unless we have goals to lead us.

Stopping points along the way

Our goals create destinations that we can use as a guide. 

Goals help us hone in our strategy

Some goals focus on growing our portfolio’s value, some aim to generate income that we can live on, and others look to minimize taxes owed. Each of these goals will lead to a different set of investment strategies - as different types of assets and accounts will be better suited to achieve each of these goals. Picking the "best" strategy is about choosing the one that gives us the highest chance of achieving our objective.

 

Actionable ideas

Start thinking about what your goals are. What do you want to do in life, why do you want to invest, and is there something you are investing for? While your answers will be highly individual, the SMART framework provides the steps to make your goals even more helpful. It’s normal for your plans to change over time, but your strategy and investments will change with them.

Supplementary materials

Here's a video providing extra depth on goal-based investing
https://www.youtube.com/watch?v=hZFq886zVFo&ab_channel=TDTD

Glossary

What is Goal-based investing?

When we invest in the financial markets to fund specific objectives rather than generate the highest possible return.