Finding the right place to start investing can seem daunting. There are investments to choose, accounts to manage and rates of return to track. But with goal-based investing, it starts with a simple question: What is your goal?
Jessica Moorhouse remembers the day she and her husband picked up the keys to their Toronto townhouse. “We were exhausted,” says the 34-year-old financial counsellor and host of the Mo’ Money Podcast.* It was 2016 and she and her husband had been working long days and nights to get everything organized. Still, they paused to take a we-did-it selfie in the entryway of their new home with their keys in hand. “We looked so tired and so happy at the same time.”
They really did it. They bought a home in one of the most expensive cities in Canada, in a neighbourhood Moorhouse describes as “up-and-coming” but just a short walk to the city’s scenic High Park. It’s also an investment. “Each month we update our net worth — because we’re super nerds like that — and it goes up every time we pay our mortgage,” Moorhouse says with a laugh.
According to a survey by TD Bank, homeownership is one of the most popular investment goals Canadians have. When asked their reasons for investing, respondents ranked retirement first (65%), followed by purchasing a new home (36%), taking a vacation (34%) and buying a new car (28%). Renovating a home and saving for education rounded out the list.1
But while many of us have specific goals we want to achieve, we can also have haphazard saving or investing plans, which may or may not get us there. Goal-based investing, however, brings a laser focus on making your money work steadily towards a precise, achievable goal. It can make you a better planner and help bring those goals to fruition sooner.
“When I started investing, I did have a goal,” Moorhouse says, “it was to build as much wealth as I could.” That’s a notion we all have. But she also embraces the concept of goal-based investing — the idea that we are stronger investors when we set concrete goals and track our progress toward them.
“It’s so much more tangible!” she says, adding that people often ask her what they should be investing in, whether they should be using their TFSA or an RRSP, and other financial questions. “And I say, well, it depends on why you’re investing. What is your goal?”
There are several reasons goal-based investing has been growing in popularity in recent years. But the key reason some experts recommend a goal-based approach is that it can help provide clarity and focus to our investment activities — encouragement when our goals feel so very far away, and a way to prioritize when conflicts arise. For new investors looking to find their beginning (or even older investors looking to find a new beginning) here are four reasons a goal can be a powerful place to start.
1. Goals provide focus
One key difference between goal-based investing and traditional investing is how you measure progress. In traditional investing, people will often track their rate-of-return against a benchmark or an index. If the overall market (we can use the U.S. S&P 500 as an example) has earned an average of about 5.9% over the last 30 years, and you’re earning about 6%, that might seem great. “But that has nothing to do with you personally,” says Julie Seberras, a Senior Manager at TD Wealth who specializes in goal-based investing. “It doesn’t say anything about whether you’re more or less likely to achieve your personal goal of buying a house or having enough money to retire on.” Instead, she recommends setting a concrete goal with a target date and amount of money. That way you’ll be able to see exactly how your investments are bringing your goals into focus. In fact, in the same way you might pin a snapshot of an island vacation to your fridge, being able to visualize your goals and attach them to your investments is a way to remind you of why you’re investing.
2. Goals help us make decisions
Here’s a funny thing about goals: What we want out of life can dictate how we will get there. Our goals can help us make decisions about the investments we choose, the types of accounts we store those investments in, and even how much and how often we contribute to them. Consider: “I want to save $40,000 in three years, for a down payment on the house where I’ll marry my soul-mate.” There’s an amount ($40,000), a time horizon (three years) and even a sense of priority (house, then wedding). If you’re just tucking a few hundred a month into a savings account, you may not get there. But you can choose investments that will help your money grow, calculate a plan to contribute regularly and increase the likelihood you will achieve your goal. Seberras notes that this goal even comes with an emotional connection (a soul-mate) which can help make it feel meaningful. “I always say, you have to be able to feel that goal in order to compute it,” she says.
3. Goals offer a way to measure progress
Think about a time you took a trip. Did you use a GPS? If you did, you might have noticed it gives you an estimated arrival time. The route could blink red if there’s a delay, or remain green to show smooth sailing. Just like that, goal-based investors should check in periodically to ensure they’re on-track to reach their goal or if there’s a delay and they should consider a change in course. Of course, there may be periods where you will encounter hiccups, such as a dip in your investments, but also periods when your investments out-perform. “You want to keep an eye on it, but not let short-term adjustments impact your longer-term goals,” says Seberras.
4. Goals help us make trade-offs
Do you only have one goal or many? You could have a goal for a new house, an annual vacation and, far off in the distance, retirement. It’s possible to set up automated payments to contribute to them equally, or you may decide one of them needs a little extra attention and you can throw everything you’ve got at it. Because our goals are concrete and, ideally, meaningful to us, they can help trigger behaviour. “It can be important to understand the priority of your goals because you don’t have an infinite amount of money,” says Seberras. “Knowing how your goals are ranked, allows you to make trade-offs. Which one you’re willing to give a little to or take a little from.”
If you’re just getting started in investing and trying to find your beginning, it can seem daunting. There’s a lot to learn, but goal-based investing can be an smart place to start. After all, you may find it easier to select the right investments to grow your wealth when you start by asking yourself, what do I want to achieve?