It’s a new year, which means newly laid plans are still fresh for individuals, families, and business owners in Libertyville and surrounding areas. How are you doing with your resolutions? If 2021 was too much to handle, maybe you didn’t set any. Whatever the case, today is the best time to start goal-based investing (GBI).
What is GBI?
As simple as it sounds, goal-based investing refers to a method of linking your investing specifically to goals. That may sound obvious, but many investing methods don’t do this. Are you surprised?
Some financial advisors focus on beating the stock market, for example. If the U.S. stock market returned 20 percent in a given year, their portfolios should do better. Others focus on alternative ways of measuring investment returns, such as combining consistent growth with stability.
Because there are numerous ways to customize your investment portfolio, it’s essential to select a financial advisor in Libertyville, IL, that provides a holistic approach – supporting your whole financial situation. Holistic means everything works together as a well-functioning system.
Investors, too, sometimes focus on factors unrelated to goals, such as the size of their portfolio or the amount they save each month. These are important, but GBI will provide more life satisfaction. Why? Because GBI offers you specific, measurable progress toward your goals.
If you’re saving for a second home, for instance, you will be able to track particular progress toward the down payment and purchase. If you’re retirement planning and saving for comfortable golden years, GBI will include specific information on what “comfortable” means to you and provide progress toward your estimated retirement date.
GBI offers other benefits. Investors will be much less likely to give in to impulses; for example, wanting to sell stocks in the market falls into a downswing. Setting a goal requires a completion date or time frame. It’s all about measuring growth within a specific range and investing appropriately for that time frame.
If your time frame is a concise term, your investments may well be in other asset classes than the stock market, simply because stock markets are subject to periodic downturns. And if your time frame is long, such as more than five years, the stock market will likely have made up short-term losses.
It’s also often more accessible for investors to dedicate money to their portfolios using GBI. Investing for retirement, for many people, seems like an abstract goal. Suppose you develop specific plans for when you’ll retire and what you want to do. You’ll be able to participate in progress toward a goal.
How GBI Works
With GBI, you determine your specific goals. You may have a goal of retiring in ten years, for example, saving for your children’s or grandchildren’s education or traveling extensively. Then, you work with a financial advisor to figure out how much disposable income you have to meet these goals every month.
GBI factors in several elements to satisfy your goals. Your financial advisor must determine a realistic rate of return for multiple asset classes and decide which asset classes can best meet your goals while meeting your risk tolerance.
A registered investment advisor will also consider your goals versus your present and future costs. The present cost is how much things cost now, and the future cost is what they will likely cost in the future. If home prices are rising dramatically in the area where you want to purchase a second home, for example, your progress toward that goal must consider the likely eventual price.
Finally, GBI always needs to have an inflation factor. It’s not enough just to save for the projected future cost of goals; the annual inflation rate needs accounting for as well. Generally, inflation runs at around two percent per year. Recently, however, there’s been a spike in inflation, and it’s now closer to seven percent. The rate of return needs to account for price increases due to inflation.
Four Ways to Use GBI This Year
So how can you get started with GBI in 2022? Here are four steps to take.
1. Develop a list of goals.
There’s no substitute for sitting down and creating a list of specific goals. The more concrete they are, the more you and your financial advisor will be able to meet them. Not just “retire,” for example, but “retire in ten years with the ability to travel at least twice per year.”
Think about financial planning categories: retirement, general investments, savings for an emergency fund, expenditures and income, education, risk management, and estate planning. That will ensure you don’t leave out an important goal, such as leaving legacies for your children and grandchildren.
2. Set a timeframe.
Generally, goals in GBI divide into three different time frames.
- Short-term goals are those you want to accomplish in less than one year, such as buying a more economical vehicle.
- Medium-term goals are those you want to achieve in one to five years, such as traveling.
- Long-term goals are those that take place more than five years from now, such as a comfortable retirement.
3. Prioritize all goals within a timeframe.
Once you have goals and time frames, prioritize them. Which are most important? Which are the second most important? Keep going until they all have a number.
Prioritization is essential for several reasons. First, most of us can’t meet infinite goals in the same time frame. Even those with comfortable incomes may adjust their goals or priorities once the rubber meets the road.
In other words, once you and your financial advisor work through how much you will need to achieve your goals, you may have to adjust precisely, goals or the time frame in which they can be reached. Perhaps a new car three years from now is more appropriate.
4. Work with a financial advisor.
Get in touch with a financial advisor to discuss your goals, priorities, and desired time frames. Together, you can develop a customized plan for your cash flow and the amount of money you can put toward each goal. They will determine your portfolio’s asset allocation and help you augment your savings and investments.
Your financial advisor will periodically update you on progress toward your goals as you gain the satisfaction of moving closer toward your wants and desires. The advisory services for you will offer a custom investment strategy that makes sense with your personal financial goals at heart.