Goal-Based Investing

Categories: Investing, Metrics

If we were to ask five people about major financial purchases they plan on making in the future, we’d probably get five different answers. Maybe one person wants to buy their first house, while another wants to save for their kids’ college educations. Maybe Person #3 wants to travel the world, Person #4 wants to retire in Aruba, and Person #5 wants a real-life, honest-to-goodness Batmobile. Hey, different strokes for different folks, right?

Well, the world of goal-based investing takes those different strokes into account when deciding on investment strategies. Instead of just saying, “Must make money,” goal-based investing says, “Must make money that suits what this client is trying to do with his or her life.” For example, if we’re not planning on retiring for another 40 years but we want to buy a house within the next five, our financial advisor might invest our money a little more aggressively now in an effort to get the bigger returns we want for that down payment. Or, if we’re less concerned with big returns now than we are with making sure we won’t run out of money once we retire, our money might be invested in ways that are less aggressive but provide more long-term stability, like we get with bonds and annuities.

But knowing what our goals are isn’t only helpful for our investment brokers; it’s helpful for us, too. If we can follow along with what our money is doing and how it’s helping us get closer to realizing our Batmobile dreams, it’s easier for us to get invested—pun totally intended—in the investment process. We’re more likely to keep our goal in mind, since it’s something tangible that we really want, which could lead us to make better financial decisions in our day-to-day lives.

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Finance: How Do You Judge the Performanc...132 Views

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finance a la shmoop. how do you judge the performance of an index fund? very

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carefully. actually performance means something very different when it comes

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to an index fund versus an actively managed fund. in an index fund the

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manager doesn't really do anything per se other than rebalance the indices so [man sleeps at a desk]

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that they conform to whatever the product was that you bought in the first

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place. for example a technology index fund might claim that 12% of its

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holdings will have wireless telecommunications related stocks as a

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target, but never less than 10% and never more than 15% .and in most cases the

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actual stocks that go in the fund are identified beforehand like before the [man smiles at camera]

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funds actually really launched. and the relative weightings of those investments

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is also predetermined .ie the fund might target having three percent of its total

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as shares in Verizon. but if Verizon suddenly does extremely well and doubles

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in price in a short period of time well the index fund might have to sell

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shares of that stock so that it's weighted holding amount won't pierce the

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maximum weighting of 15%. but all this relates to the composition of the fund [pie chart]

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not necessarily the performance. since an index fund is a reflection of a given

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area like these examples they conform to a general theme, like the Vanguard total

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stock market index. the broadest based reflection of the overall market. like

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the S&P 500 plus Nasdaq plus the New York Stock Exchange indices or another

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one might be the Vanguard small cap Value Index, largely companies under a

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few billion bucks in market cap which trade at relatively low price to [value index listed]

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earnings ratios ie they are value stocks rather than say growth stocks. all right

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next one might be the Vanguard emerging markets stock index. that one's all about

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third world countries trying to become second worlders how's that Nigerian

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oil exchange looking? or what about investing in Vietnam these days? the

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Napalm is mostly washed away by now. and then move it on. yep there's the Vanguard [sink with the water on]

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intermediate term bond index, and yes there are bond index funds as well.

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intermediate just means that the bonds in this set of bonds mostly come due

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within about five years or so. the bottom line is that an index fund

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isn't really a managed fund. it's just a reflection of whatever group of stocks

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or bonds it is supposed to reflect. so if an index performs poorly, all of the [man holds stock]

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fault lies in the one who chose that particular index fund, not the manager of

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the fund because well there basically wasn't one, so if your fund as poorly and

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you want to scream at the idiot moron financial manager who screwed up your

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retirement by picking a bad investment vehicle ,well go find a mirror. [woman grimaces and cries]

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