Why Goals Based Investing Works for Wealth Management

By Brian Seay, CFA

Founding Partner, Capital Stewards

Do you find joy in having a mean-variance optimized portfolio? What about knowing that your investments have a high sharp ratio, better known as a good historical risk and return profile? Does your financial advisor beating the “relevant benchmark” get you excited?

You don’t care about those things? No one does. Except maybe a few crazy wealth management professionals. Focusing solely on those things is like going to doctor for an earache and obsessing over whether the otoscope (the tool used to look inside the ear) works properly. Like the otoscope, the concepts I mentioned are all important tools used to build investment portfolios, they are critical in the process, but they aren’t why we invest.   

We invest to accomplish our goals. That’s what gets us out of bed in the morning. Our Huntsville financial advisors start with understanding what you are seeing to accomplish with your investments, and build portfolios to accomplish your goals. Why do we take this approach? Because research shows that it provides investors with a high probability of becoming successful investors over the long-run.

Goals based investing was created in the early 2000’s by Jean Brunel. Instead of simply assessing your willingness to take risk and building an “efficient” portfolio that produces as much return as possible based on your risk tolerance, the goals based approach focuses on building portfolios that achieve specific future goals. Goals may be retirement, transferring wealth to the next generation, funding a business venture, giving to the community and many others. Instead of just having great portfolio stats, the goals-based approach allows us to understand how likely we are to achieve our goals.

The goals-based approach does not throw out the older efficient portfolio concepts and it doesn’t ignore the quantitative rigor that goes into investment portfolio construction. Instead, it flips the starting point around from a mathematical approach that may (or may not) result in goal achievement to a goals-led approach that starts with goal achievement and applies the quantitative portfolio construction methods to the goals. Said differently goals, which are developed in partnership with your financial advisor, are the starting point. Then, investment portfolios are constructed to accomplish goals with a degree of confidence based on historical return data. In 2010, Harry Markovitz, the original creator of most classic portfolio theory, wrote a paper that joined his work with Brunel’s goals based work. So even the academics are onboard with a goals-based investing approach!

When we start working with new wealth management clients, one of the objectives of our first workshop is always goal formulation. Our financial advisors are experienced at helping you form goals that can be used in the financial planning process. We also know that you don’t have your whole life mapped out, so we use flexible, digital tools that allow us to pivot as life evolves. Those goals form the foundation of everything we do going forward, from investments to tax reduction strategies to estate planning, everything revolves around achieving your real-life goals.

Would you like to discuss your wealth management goals with a professional? Schedule a call with one of our team members here.

Want to dig deeper?

You can read Markovitz’s updated paper, Portfolio Optimization with Mental Accounts here.

Jean Brunel’s work is in a textbook, published by Wiley. You can get it here… or call us and we’ll send a copy!