Goals-Based
Wealth Management
Achieving an Appropriate Balance
Introduction
The Appropriate Balance approach - Goals-Based Wealth Management - is a process based on you.
We start by identifying and quantifying your goals and then developing a strategy to maximize the likelihood of realizing those goals.
It is important to take a holistic view of your family’s wealth. Assets, liabilities, and income streams all impact wealth and future lifestyle. We help you find an appropriate balance between the need to protect net worth and the desire to increase it.
You are likely accustomed to
traditional asset allocation, which tends to combine all investments and make a single allocation consistent with an investor’s overall risk tolerance. This is often market oriented, composed primarily of exchange-traded assets, and its performance is judged by market benchmarks.The way we do it
at Appropriate Balance is different. Our Goals-Based Wealth Management approach is based on financial planning concepts. We employ traditional asset allocation but also take into account important life variables such as your earning potential (ability to generate income in the future), and the aspirations you have for your wealth.Have you considered your investment priorities?
It may seem most important to just “beat the market,” but is that really what you’re after? No one can control the markets or their volatility, and making goals wholly dependent on how markets perform, can be dangerous and disappointing. We believe that it makes more sense to focus on achieving your essential goals, with a high degree of certainty, and building your wealth from there.What is your real objective?
Aligning your investment strategy with the goals you and your family have can be much more satisfying. Our goals-based approach places the emphasis onBenefits of a Goals-Based Approach
Your investments should be tied to your goals, not what is happening in the market. Greater confidence, clarity, and understanding can be realized when investment portfolios are aligned with personal goals.
That alignment can also provide a broad perspective and greater discipline during periods of market volatility. As is shown below, investors using a goals-based approach are less likely to panic and liquidate or make other dramatic changes to their investment strategies during volatile markets. Sticking with the course created to achieve your goals not only increases the likelihood of achieving those long-term goals, but can produce a sense of purpose and freedom.
Clients in a Single, Traditional Investment Portfolio
Fully Liquidated Portfolio, 50% Made no Changes, 20%
Adopted a Goals-Based Approach, 20% Significant Allocation Changes, 10%
Clients in a Goals-Based Investment Portfolio
Made no Changes, 75%
Increased Basic Needs Bucket, 20% Delayed Implementation, 5%
Aspirational Goals: What legacy do you want to leave, not only for your family, but for others (e.g., charity)? Lifetime Goals: What are your desires/wants? How much risk are you willing to take to achieve those goals?
Lifestyle Reserve: What are your basic needs? What income sources do you have or will you need to create?
Distribution Reserve: What are you immediate income and distribution needs for the next couple of years?
Allocate by Goals, Diversify by Risk
Personalized, goals-based asset allocation begins with finding the appropriate balance between investor goals and investment portfolios. These are critical decisions, and tend to be longer term in nature; they typically do not change much during short-term economic conditions or market fluctuations.
Funding A Distribution Reserve
“Keep this money available in a low risk, liquid investment portfolio. I can tolerate low returns on this money, and I can accept that because I’m planning to withdraw it before long and want to minimize risk to this capital.”
Protect and Distribute
This bucket is focused on distribution needs, whether for retirement living expenses or otherwise. You are planning to spend this money so it is no longer focused on growth. We just try to keep it as productive as possible, while keeping it very liquid.
Typical Distribution Assets
Income/yield oriented assets (e.g., CDs, fixed annuities, short-term bonds, etc.) Assets with low volatility
Short-term assets with little interest rate sensitivity
Distributing Retirement Assets—Don’t Outlive Your Assets
Funding A Lifestyle Reserve
“These are assets allocated to maintain my basic needs and help alleviate financial anxiety. Limit my downside risk, even though that generally means lower returns.”
Protecting Your Current Lifestyle
This “Lifestyle” portion of your asset allocations corresponds to your most essential goals - those that must be met to protect your current consumption and lifestyle. Assets in this category are there as part of your personal safety net. We focus on determining how much money you absolutely need, and for how long, and then make sure your assets are allocated accordingly.
Lifestyle Risks
What personal risks could jeopardize your attainment of future goals? Could you financially handle the loss of your job, health problems, disability, or the death of a spouse? How many of those risks can be insured against? The ability to weather personal/event risks is critical to the success of other goals. Needs-based
allocations - along with other forms of protection - serve to protect against risks that jeopardize your standard of living.
Protection Components:
Home equityThe ability to generate income (through investment or labor) is
extremely important, particularly prior to retirement.
An emergency cash reserve
Insurance (homeowners, disability, long-term care, life) Social Security
Lower-risk investments, e.g.:
Equity vehicles/strategies that emphasize limited downside
exposure to beat inflation
Fixed income vehicles (bonds, high-dividend stocks, etc.) for
Funding Lifetime Goals
“These assets are intended to accumulate and grow, taking on increased risk to do so.”
Invest Now for Rewards Later
This bucket is intended to fund higher, longer term goals - such things as a more comfortable retirement, children’s education, a vacation home, a nicer vehicle, and extra travel. You may need to take on a little more risk to achieve these goals, but because your basic needs are taken care of, you can afford to do so.
Focus: Long-Term Rewards
The longer term nature of these goals makes it feasible to utilize investments with increased volatility and risk. These assets should enable your wealth to withstand economic downturns and continue to grow over time, increasing your wealth well in excess of inflation.
If/when your “Lifetime Goals” are fully funded, you should find that money is less of a concern to you. You are able to do what you want without worrying whether you can afford it or not. At that point, you might be perfectly content to stop here, simply maintaining your net worth to support those future goals. You might, however, decide at that point to take higher risks with some of your assets (see Goal 3 on the next page).
Typical Market Assets Utilized
Growth-oriented equities Fixed income vehicles Fund-of-fund investmentsFunding Aspirational Goals
“These assets are intended for ambitious goals, and can involve significant but measured risk to capital. These assets provide me with an opportunity to increase my wealth and reach my aspirational goals.”
Moving the Needle
Your allocation to “Aspirational Goals” seeks investments that can have a significant impact on wealth if successful. This is your “Wouldn’t it be great if…” money. You need to take on significant risk at this level, and investments are often opportunistically focused.
Concentrated Wealth
It has been said that concentration creates wealth, and diversification preserves it. Your allocations to Lifestyle Reserve and Lifetime Goals serve to diversify your risks and investments. The allocation to Aspirational Goals concentrates solely on growth of capital.
Examples of Aspirational Assets
Small business/professional practiceOpportunistic investment strategies using market securities Company stock or stock-option positions
Investment real estate
Conclusion
While no single framework can anticipate every goal or challenge, the Appropriate Balance Goals-Based Wealth Management approach integrates investment management with a broader, deeper wealth management process focusing on what is most important to you.
No longer is the plan centered around your comfort with volatility and market declines (although it certainly reflects your long-term tolerance for risk). Instead, it considers and prioritizes the importance of your goals, and the real-life
consequences of reaching or not reaching them.
The simple truth is that most families need to more clearly “map” their assets to their goals. They will likely find this process successful and satisfying. Once you have identified your major goals, quantified the capital needed to meet each goal, and implemented a portfolio aligned to achieve them, you should have two things - a better chance of reaching them, and greater peace of mind regarding your financial future.
