For some investors, targeting the highest rate of return possible or beating a particular index is the only investment strategy, but what is driving that strategy at the core? In building efficient portfolios, investors often answer a series of questions to determine tolerance for risk, short-term market swings, and downside volatility. These factors are important to consider, but beyond that, what is the purpose of the money? What is the goal the investor is trying to achieve and what is the time horizon? The shift in focus to achieving a successful outcome or reaching a goal rather than a particular rate of return is what drives goal based investing.

What Is the Goal?

Establishing a goal or a purpose for the money being saved (instead of spent) allows investors to visualize a more tangible outcome, rather than focusing on outperforming a certain index. Goals range from building an emergency reserve, saving for a house downpayment, saving for children’s college education, saving to start a business, saving for retirement and much more. Assigning a purpose to the money psychologically creates more of an incentive to save. This helps investors track their progress toward achieving their goals.

What Is the Time Horizon?

While downside volatility and short-term market swings are not to be ignored, assigning a time horizon to each goal is a critical step for determining appropriate portfolio construction. If a particular goal has a long time horizon, short-term market swings should be less of a driver in the asset allocation decision-making process. On the flip side, if the desire is to fund a goal within the next couple of years, market swings and volatility become more impactful. In some cases, it may be prudent to not invest the funds at all. Investing spans across an entire lifetime and it is important to pair each goal with its life stage.

Contact Sharkey, Howes & Javer to speak with a CERTIFIED FINANCIAL PLANNER™ professional about establishing a portfolio allocation that aligns with your goals and life journey.

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