Have you ever made a bet that you were almost certain you would win only to be wrong? If you had to go back and make the same bet again would you do it? How we make decisions and the information we choose to inform our decision making process can have lasting impacts on our financial plan and our chances of success. In the world of investing we buy stocks because we believe they will increase in value over time or otherwise return capital to us in a meaningful manner. (capital appreciation, dividends, stock buybacks etc.)
In today's post I want to talk about Goals Based Investing.
We see Goals Based Investing as an important and meaningful way to align the values of the investors and their desired outcome with a strategy that is mindful of who they are and who they want to become. We provide clients with strategies that are mindful of their financial capacity for risk and desired risk tolerance. With an awareness of when funds are needed and other challenges that could impair, alter or keep the investor from attaining their desired outcomes in the markets and in their personal financial plan.
At Sterling Edge Financial we believe and practice, Goals Based Investing. A Goals Based Investment philosophy focuses on the purpose of the investment as a guiding principle to inform our strategy. What do we need the money for and when do we need it? Are we investing for a specific event or long term financial need? Examples include:
- Financial independence / retirement income
- Paying for a college education
- Funding a major purchase or life event (home purchase, vacation, career change, move)
- Additional passive income to enhance earned income
- Beating inflation - protecting the purchasing power of savings
Are you investing with a purpose or are you investing for the highest return possible?
The past several years the market has seen big moves by massive companies.(2017 -2020) Mega cap stocks, with market caps over $200 billion dollars have generated the highest returns and regularly command market headlines. It is easy to get fixated or overly focus on these companies given their place in the minds of investors, their interaction with the companies in the marketplace and the ability of these companies to make up a large percentage of investor portfolios. So, should we chase the headlines? Does past performance provide a guarantee of future performance? The short answer to both is, No. Using these data points in a vacuum to make decisions is not an investment strategy. It can also get investors engaging in behavior that is inconsistent with their values and more in line with speculation, and more for the sake of more.
If more is always the answer when you are looking for investment returns you will always be disappointed. More for the sake of more is not a financial goal. Aspiring for the best trade or investment year after year outside of goals isn't what financial planners and wealth management advisors do.
With all of this movement it is easy to forget about diversification, maintaining an investment strategy. When we buy into equity markets it is easy to fall victim to recent returns and hindsight bias. Be careful, buying into strategies because they did well yesterday instead of their fit into an investment strategy designed to generate future returns specific to your goals and needs can add additional risk to investing and reinforce bad financial behavior.
Are you ready to raise your financial awareness? Interested in additional perspective to challenge your current financial decision framework?
A few light reads if you are looking for additional perspective heading into next year.
- Thinking in Bets - Anne Duke
- The Psychology of Money - Morgan Housel
Market update and observations by money managers at SEI Private Trust Fall 2020 -