Goal-based investing approach: is it a post-pandemic new norm?

What is the goal-based investing approach, and why does it matter? Ron Miura Ryutaro, a Certified Financial Planner (CFP) and a member of the Financial Planning Association of Singapore (FPAS), breaks down the basics of this approach and how it can be helpful for investors.

Since the beginning of the year 2022, the stock market has been in market turmoil due to political conflict between Ukraine and Russia, as well as the rising price of oil, energy, and commodities.

Likewise, the world is facing mid to high single-digit inflation, i.e., >8% in the US, >5% in Singapore, >7% in Thailand and slower economic growth compared to the past few years.

The traditional investment portfolio, which has consisted of both bond and equity, does not hedge against this recent hyperinflation. It means the traditional investment portfolio has failed to diversify its investment and has lost its value of money.

Short-term market turmoil would tend to discourage clients to stay invested in the longer term, and it would make some clients worry and rush to sell assets due to their fearful emotions.

It’s no surprise some clients fail to plan for their financial goals. Clients’ emotions would make clients judge the market prematurely and derail clients’ multiple financial goals even though clients fully understand the basic principles of investment theoretically, which means “investment time horizon should be as long as possible”.

What is the goal-based investing approach?

Recently the new investment concept: “goal-based investing approach” is emerging. What is the definition of the goal-based investing approach?

According to Investopedia, “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”.

Why does goal-based investing matter?

The goal-based investing approach can empower clients to make a commitment to their multiple life goals.

Clients’ typical financial goals include university funding costs, retirement planning as well as residential property purchasing planning. Furthermore, some high-net-worth individuals might include wealth succession planning as well as overseas tax optimization planning.

As clients’ family members migrate into the high-taxed jurisdictions for study and/or work, their life goal planning usually goes beyond Singapore. Clients have invested in both movable and immovable assets in other English-speaking countries which are deemed as high-taxed jurisdictions.

Especially Certified Financial Planners and clients – they need to pay additional attention to inheritance tax when clients implement wealth succession planning overseas. CFP professionals need to uncover clients’ multiple needs and goals to align with clients’ overall wealth management strategy.

Even though clients are facing capital market uncertainty now, they do not have to beat the stock index benchmark in the short term. Achieving clients’ life goals, in the long run, is paramount.

Have clear goals to find the appropriate investment strategy

Clearer multiple financial goals can help clients to find the appropriate investment strategy. Usually, university funding costs take a relatively long-time horizon, i.e. 10 to 15 years, whereas retirement planning takes a much longer horizon, i.e. 20 years to 30 years.

Although CFP professionals need to refer to clients’ level of risk tolerance according to the regulatory requirements, value at risk should also be considered to understand what level of temporary investment loss clients can accept.

Once clients’ multiple financial goals are understood, CFP professionals can start constructing the systematic investment strategy and determine the allocation of asset class, i.e. equity, gold, cash, bond and other private markets.

To purchase the property, clients must set aside for the down-payment fund. Therefore, the investment strategy requires a shorter time horizon i.e. around five years and asset allocation needs to be focused on more liquid assets.

The key to successful investing

Investing in a longer time horizon is the key to successful investing. That’s because the longer the time horizon, the higher the probability of investment success.

It is feasible for investors to invest regularly in a diversified investment portfolio in the longer term. Sometimes, rebalancing the investment portfolio is needed based on capital market sentiments and changes in clients’ life events.

This systematic dollar-cost-averaging can reduce impulsive decision-making and achieve a higher return on investment in the long run. It does not matter when clients start investing. Time in the market is the key, not timing the market.

Adapting to the goal-based investing approach

To summarize, CFP professionals and clients need to adapt to the goal-based investing approach, and this should be the new norm, especially during this market volatility period.

Although people tend to focus on and worry about short-term investment performance and market news, CFP professionals must stick to the original multiple financial goals and empower clients to focus on them. That’s because this short-term emotional disruption might derail what is most important to clients.

It is “to achieve clients’ multiple financial goals and objectives in the right timeframe’’.

How does the goal-based investing approach work well for clients?

Clients need to know approximately the investment purposes, time horizon, and amount of money that they need to accumulate and/or preserve.

Staying invested in the longer time horizon of at least 10 years would be the key to a successful investment strategy. The longer the time horizon they have, the better return of investment they can achieve amid the short-term market volatility.

Consistency in investment can be achievable to control emotional anxiety and improve the holistic process of investment success. Indeed, most clients’ irrational investment decisions tend to arise from emotional behaviour.

If clients need to receive any goal-based and holistic financial advice, clients can feel free to contact any Certified Financial Planners.

Ron Miura Ryutaro is a Certified Financial Planner (CFP) and a member of the Financial Planning Association of Singapore (FPAS).

This is a FPAS x Money Playschool collaboration.

The article “Goal-based investing approach: is it a post-pandemic new norm?” – by Ron Miura Ryutaro, CFP, first appeared in Financial Planning Magazine, a FPAS publication.

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