Why a goals-based approach is key to financial planning

The strategy increases the chances of achieving your objectives and instils discipline in investment

The Covid-19 pandemic is likely to cause a semi-permanent change in risk attitudes among older, wealthier individuals, who are now inclined to save more and spend less. Photo: moodboard/Corbis

There are several emerging trends in the wealth management space. One of the most important is how clients are increasingly seeking personalised investment plans rather than taking a traditional approach to building investment portfolios.

This trend is partly due to a reaction to the Covid-19 pandemic, which is expected to cause a semi-permanent change in risk attitudes among older, wealthier people who are now inclined to save more and spend less. This is the inverse of what we have seen traditionally.

The investment goals of older people previously took a shorter-term view, while younger investors – with time on their side – engaged in a longer-term view to achieve financial independence and realise goals such as home ownership and retirement planning.

Typically, we have seen that clients planning for the long term invest in equities and diversified solutions such as mutual funds, or alternatively into long-dated quality sovereign and corporate credit, offering a regular income stream.

More recently, there has been a rise in the popularity of environmental, social and governance-focused investments, along with increasing awareness that these factors can be tied to a company’s long-term performance.

One clear trend is that amid the current market uncertainty, wealth management is rising in prominence to help meet the goals and aspirations of clients looking for sustainable ways to build and protect their financial futures.

For those at the beginning of their investment journey, it is critical to identify a clear set of goals and invest with them in mind. As an investor, this will enable you to determine where, how much and how long to invest. Additionally, it increases the probability of achieving your goals, as well as inculcates discipline and acts as support during a difficult period.

Start your financial planning journey with goals-based investing.

Identify your goals

You can have several goals, ranging from ensuring a comfortable retirement and buying a mansion to saving for a luxury vacation – each with a unique timetable. Some need to be achieved in the short term (zero to one year), some in the medium term (two to five years) and others over a period of five years and above.

Wealth advisers can help you prioritise and calculate the amount required to meet goals of various timelines, create an investment portfolio to achieve them and an emergency fund of liquid investments that can be used in unforeseen circumstances.

Determine risk profile

Every investment carries a certain degree of risk. Similarly, every investor will have a unique risk profile, which reflects one’s ability and willingness to take those risks. This is a vital factor to take into account before one constructs their portfolio.

For those seeking to create long-term wealth, it is important to focus on risk-adjusted returns. This can be achieved by ensuring that the overall risk of your portfolio is aligned with your risk appetite.

A risk-averse strategy should ideally weigh heavily towards fixed-income bearing investments, while those willing to absorb high levels of risk can skew towards medium- and high-risk investments.

Create an optimal asset allocation strategy

Once the goals, risk profile and investment time horizon have been determined, the next step is to create an asset-allocation strategy that can help you achieve your goals while adhering to your risk-return, time-bound criteria.

An asset allocation strategy creates a diversified portfolio that is spread across several asset classes. Since different asset classes respond varyingly to similar macroeconomic developments, diversification ensures that no single asset class has a large impact on overall portfolio returns.

A key takeaway from the pandemic has been to take a long-term view towards investments, where possible. Being patient and potentially holding onto investments, even when markets are down, could reap rewards when they recover in value in the future.

Additionally, the pandemic has shown that investors should not put all their investment “eggs” in one basket. For example, if the bulk of your investments was in airlines, the Covid-19 pandemic would have slashed the value of your portfolio.

Therefore, the best hedge against market volatility remains a balanced and diverse portfolio that spreads risk.

Monitoring

Investment management is an ongoing process. It requires discipline and the right guidance. You must periodically review the performance of your portfolio to ensure that you are still adhering to your chosen asset-allocation strategy and remain on track to achieve your financial goals.

In the event of any divergence, remember that you can always take steps to correct your course. Goals-based investing gives your financial plan purpose and helps you to invest in a targeted and methodical manner.

Mufazzal Kajiji is head of Mashreq Gold at Mashreq Bank.