Goals-based investing is a means to an end (www.futurityfirst.com)

The “envelope system” is a well-known money-saving strategy.

The idea is to save for your goals—a down payment for a home, a new car, a vacation—using a series of envelopes. Every payday, you peel off a little cash and deposit it in your envelopes, slowly chipping away at your goals.

Things have gotten a little bit more sophisticated over time, but the time-honored envelope system is the same idea behind the growing trend of goals-based investing. In investing parlance, it’s known as “mental accounts,” where each of your financial goals are funded and invested independently. Each goal, because it has a unique time horizon, has its own asset allocation and its own risk profile.

Cash in envelope savings

Altrendo Images | Getty Images

“The reality is that most of us have multiple risk profiles for multiple goals,” said Jean Brunel, managing principal of Brunel Associates, author of “Goals-Based Wealth Management: An Integrated Approach to Changing the Structure of Wealth Advisory” and a practitioner of goals-based investing since 2004.

Rethinking risk

Financial advisors have been practicing goals-based investing for about 15 years, but the strategy really took off in the wake of the financial crisis, when even the most dedicated investors had a hard time stomaching extreme losses.

Goals-based investing, advisors say, quells nerves because investors can measure the severity of a drop in their portfolios to how it relates to their goals.

“When you don’t do goals-based investing, you’re kind of anchorless,” said Daniel Egan, director of behavioral finance and investing with online advisor Betterment. “‘I want to have more money in the future’ is not a goal.”

Goals-based investing tries to marry Modern portfolio theory—the foundation of most asset-allocation strategies, first introduced by Nobel Prize laureate and economist Harry Markowitz—with investor behavior.

Modern portfolio theory holds that an optimum portfolio is one that gets the most return for every unit of risk. If it does, it is considered to be on the efficient frontier.

“I can tell you that using goals-based investing makes periods like 2008 incredibly easy to handle.”-Jean Brunel, managing principal of Brunel Associates

“The problem is that most people can’t handle a portfolio that’s on the efficient frontier,” said Jonathan Scheid, president and chief investment officer of Bellatore Financial, which provides portfolio management for financial advisors.

Scheid, along with co-authors Sanjiv Ranjan Das, Markowitz and Meir Statman, co-wrote a paper, “Portfolio Optimization with Mental Accounts,” in the Journal of Financial and Quantitative Analysis in 2008.

What’s more, modern portfolio theory is not the way that most people understand investing.

“Now when you walk into any financial advisor’s office, they’ll tell you, ‘This is the right asset allocation you,'” said Ashvin Chhabra, former chief investment officer at Bank of America’s Merrill Lynch unit and author of the recently published book, “The Aspirational Investor: Taming the Markets to Achieve Your Life’s Goals.”

“What you should be thinking about is, ‘Will my kids go to college?'” he said.

Different goals require different risk profiles. For example, an emergency fund should hardly take on any risk and, in turn, provide very little return. But there’s no fear that its value will drop.

Polyak, Ilana. “Goals-based Investing Is a Means to an End.” Web log post.Inc. N.p., n.d. Web. 7 Aug. 2015.


For more information, contact our Recruiting Manager Allie Vossoughi at allievossoughi@ffig.com & 602-314-7580, or Thomas Shultz, Managing Director  at thomasshultz@ffig.com & 602-314-7580, or Scottsdale Associate Managing Director Nancy Monaco at nancymonaco@ffig.com & 602-314-7580, or Scottsdale Associate Managing Investment Director Tom Bugbee at thomasbugbee@ffig.com & 602-314-7580.

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Thomas Bugbee

Futurity First Insurance Group

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