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How to Build a Goal Driven Portfolio?

Updated on :  

08 min read.

Most investment portfolios these days are built on a specific goal that the investors are looking to achieve. Knowing the goal before-hand is beneficial as it helps investors in deciding the structure of their investment portfolio. We have covered the following in this article:

What is Goal Driven Portfolio?

The goal-driven portfolio is comparatively a new way of managing investment and wealth, which stresses on investing with a view of achieving specific goals and requirements. Generally, goal-driven investments include a financial advisor or wealth manager, helping their clients with the roadmap to accomplish their goals. Each investor may have his or her purposes, such as retirement planning, children’s education, and so on. Some investors would bear some risk in exchange for high returns while others would prefer to stay risk-averse to protect their capital, and they don’t focus much on beating the benchmark.

Understanding a Goal-Driven Portfolio

As mentioned earlier, goal-based investing varies considerably from the conventional way of making investments. In the concept of the goal-driven portfolio, the success of an investor depends on whether or not he or she can meet their goals and requirements and not on how well their investments have performed over a given timeframe. The comparison of the performance of investments against the benchmark will not have any significance once the investor achieves the goal. In short, goal-driven investing is all about achieving the set goal and not on beating the benchmark. For instance, an individual who is looking to secure his retirement in about a year will not like to bear any risk and would rather look at preserving everything that they have accumulated in their portfolio thus far. This investor will have to look at options that provide the much-needed security for the accumulated corpus rather than the opportunity for growth. A goal-driven portfolio will help individuals in defining their meaning of success as per their needs and will make the comparison of their portfolio performance with the benchmark insignificant. Typically, an investor wanting to secure his or her retirement, which is not far will have a conservative approach in building his or her portfolio. In contrast, the investor who is planning for long-term needs such as children’s higher education (which is about fifteen years away) would have a much aggressive approach in building their portfolio.

Importance of a Goal-Driven Portfolio

Individuals must build their portfolio around their goals these days. This will help individuals to plan their portfolio better as they would know the extent of risk they are willing to take and can include suitable investment options and strategies in their portfolio. For instance, an investor who is looking at securing his or her retirement in a short span could allocate about 10% of their portfolio towards equities. In comparison, the rest 90% could go in fixed-income securities that are considered much safer. On the other hand, investors looking to plan for a goal which is about fifteen years away, such as children’s higher education may allocate about 50% of their portfolio towards equities and fixed-income instruments. The following are the benefits of having a goal-driven investment portfolio:

  • The long-term financial planning around a particular goal will ensure that the investor stays away from making impulsive decisions depending on the market movements
  • The investors will not be needed to look at how the markets have performed over a given period if they go on to achieve their goal.

Having a goal-driven portfolio is good in the long run as investors will be transparent with that they want and can make investment-related decisions accordingly. There is no need to compare the performance of their portfolio of investments with the benchmark as there is no need for it.

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