GOAL BASED PLANNING

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What Is Goal-Based Planning?

Goal-based planning is a relatively new approach to wealth management that emphasizes investing with the objective of attaining specific life goals. Goal-based planning (GBP) 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.

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Understanding Goal-Based Planning

Goal-based planning differs from traditional investing, in that its yardstick for success is how well the investor is able to meet his or her personal life goals, rather than how well his or her investments perform against the market average in a given period.

Consider an investor who is looking forward to retirement within a year, and who therefore cannot afford to lose even 10% of his or her portfolio. If the stock market plunges 30% in a given year and the investor’s portfolio is down “only” 20%, the fact that the portfolio has outperformed the market by 10 percentage points would offer scant comfort. That investor needs to focus more on maintaining, rather than growing, wealth in order to reach his or her personal goal of affording retirement within a year.

Key Takeaways

  • Goal-based planning emphasizes attaining life goals.
  • Life goals including saving for college and building retirement are part of goal-based planning.
  • Goal-based planning focuses on life goals rather than obtaining a high portfolio return.