Is Your Portfolio Built Around Your Goals or Their Model?

Sean Sevey |

Throughout my 24-year tenure as an advisor, my preference has leaned towards a Goal-Based investment strategy and plan as opposed to an asset allocation model portfolio, and this inclination is grounded in several reasons. While Goal-Based investing and Model Portfolios both prove to be valid and successful investment strategies, they distinctly differ in their approaches and intended purposes.

Goal-based investing, as the name suggests, centers around specific financial goals or objectives that an investor wants to achieve. It involves tailoring the investments to meet the needs of a particular financial goal, such as providing cash flow, inflation protection or leaving a legacy. The allocation of assets is often based on the investor's risk tolerance and time horizon for each specific goal. This approach allows for a flexible asset allocation strategy, where the portfolio can be adjusted over time to align with changing circumstances or market conditions.

Here are some reasons we focus on a goal-based investing approach over an asset allocation model:

1. Clarity of Objectives:

   - Goal-based Investing: This approach focuses on specific financial goals such as retirement, education, or buying a house. It helps investors to clearly define their objectives and tailor their investments accordingly.

   - Asset Allocation: Asset allocation typically involves dividing investments among different asset classes (stocks, bonds, cash) based on risk tolerance and time horizon, but it may not explicitly tie to specific goals.

2. Personalization:

   - Goal-based Investing: Allows for a more personalized investment strategy that aligns with individual goals, risk tolerance, and time frames.

   - Asset Allocation: May be more generalized and might not take into account individual goals and preferences.

3. Risk Management:

   - Goal-based Investing: Focuses on managing risks specific to achieving particular goals. This can include adjusting the portfolio as the goal approaches to protect against market volatility.

   - Asset Allocation: Primarily manages risk at the overall portfolio level, without necessarily considering the specific goals within the portfolio.

4. Behavioral Considerations:

   - Goal-based Investing: Helps investors stay disciplined by maintaining a long-term perspective and focusing on achieving specific objectives, reducing the likelihood of emotional reactions to short-term market fluctuations.

   - **Asset Allocation:** Relies on a more general approach to risk and may not provide the same psychological reinforcement of progress toward individual goals.

5. Dynamic Adjustments:

   - Goal-based Investing: Allows for dynamic adjustments in the portfolio as goals change or evolve over time.

   - Asset Allocation: May not automatically adjust to changes in individual goals and may require more active management.

6. Communication:

   - Goal-based Investing: Enhances communication between Sevey Wealth and our clients by providing a clear link between investment decisions and specific financial objectives.

   - Asset Allocation: Communication may be more focused on overall portfolio strategy and market conditions.

7. Long-Term Focus:

   - Goal-based Investing: Encourages a long-term perspective by emphasizing the importance of staying on course to achieve predefined financial goals.

   - Asset Allocation: Can be more focused on short- to medium-term market conditions and rebalancing strategies.

Ultimately, the choice between goal-based investing and asset allocation may depend on your individual preferences, the complexity of your financial goals, and the need for a more personalized and dynamic investment strategy.

At Sevey Wealth, most of our clients are seeking a more tailored approach to their wealth than a model. Is your advisor investing your portfolio towards your goals or their model?