Goals-Based Investing – A Superior Investment Approach and Improved Measurement of Financial Success

Investing is a powerful tool that helps reach financial goals and grow wealth over time. Investors have historically tried to measure the success or failure of their investments by comparing performance to market-based benchmark indices, such as the MSCI All Country World Index, S&P 500 Index, Bloomberg Government/Credit Intermediate Bond Index, 90 Day U.S. Treasury Bills, or perhaps some blend thereof. This practice follows the precedent and tradition set by the mutual fund investment management industry, where mutual fund manager performance is tracked against a benchmark index or peer group. But this approach offers little value to most investors who are trying to attain financial success over the course of their lives. In recent years, a novel approach has gained popularity and arguably proven to be a superior approach – goals-based investing.

Goals-based investing represents an improvement upon the earlier performance measurement model as it aligns your investment strategy with personal financial goals. Investopedia link to other site states that “Goal-based investing involves a wealth manager or investment firm’s clients measuring their progress towards specific life goals, such as saving for children’s education or building a retirement nest-egg, rather than focusing on generating the highest possible portfolio return or beating the market.” This approach provides more meaningful relevance to most investors, who are trying to reach their financial goals over the long term, rather than trying to outperform a market-based index that fails to capture these same aspirations.

One shortfall of market index-based benchmarking is the temptation to chase fast, short-term market trends, and make impulsive investment decisions. Goals-based investing helps promote a long-term perspective and reduces emotional impulsivity in times of short-term market volatility. This long-term approach requires initial and up-front conversations to define investment goals with a relationship manager, financial planner, and/or portfolio manager. It is then important to ensure the investment strategy is aligned with goals. The approach requires periodic and regular review of progress toward goals. Finally, it can also require adjustments in investment strategy over time. In following this process, goals-based investing helps investors keep a long-term focus by shifting the emphasis from short-term market fluctuations to the achievement of long-term personal goals.

The investment industry and financial markets are constantly changing, and investing is not a one-size-fits-all approach. Goals-based benchmark investing offers the flexibility to design investment strategies to better meet evolving goals, market conditions, and personal circumstances. While market index-based benchmarking can still be a suitable approach, goals-based investing offers a more personalized and effective approach to achieve financial success. By aligning personal goals and investment strategy, investors can realize a more purposeful and rewarding journey, leading to a higher quality of life and more long-term focus on what really matters.

Washington Trust Bank believes that the information used in this study was obtained from reliable sources, but we do not guarantee its accuracy. Neither the information nor any opinion expressed constitutes a solicitation for business or a recommendation of the purchase or sale of securities or commodities.

About The Author

Nick is a Vice President and Portfolio Manager for Washington Trust Bank's Wealth Management & Advisory Services. With nearly 20 years experience in portfolio management, he strives to bring a holistic approach to meeting our clients' goals as it relates to their investment portfolios. Nick partners with Relationship Managers to bring disciplined, comprehensive, client-focused solutions as he works with the Portfolio Management team to structure client portfolios.