Goals-based investing
Dividing a client's wealth into sub-portfolios, each invested for one goal with its own horizon and required probability of success. Risk is the chance of missing a goal rather than volatility.
Where you will meet it
Goals-based investing appears in 5 learning outcomes on the CFA syllabus. A few of them:
- Contrast what goals-based, liability-relative and asset-only allocation each set out to achieve
“The goals-based approach, used mainly for individuals, breaks wealth into sub-portfolios, each funding a specific goal such as lifestyle spending, education or a bequest, with a required probability of success for each.”
- Contrast how risk is defined when allocating on a goals-based, liability-relative or asset-only basis
“For goals-based allocation, risk is the probability of failing to meet each goal within its horizon.”
- Propose an asset allocation suited to what the investor wants to achieve and the limits they face, and defend it
“Identify which approach fits (asset-only, liability-relative or goals-based), then screen the candidate allocations.”
- Explain how a client's requirements and attitudes toward particular investment risks can be built into an asset allocation
“Behavioural preferences such as loss aversion may justify goals-based sub-portfolios that clients understand.”
Practise it
Practise goals-based investing until it is automatic: questions that explain every wrong option.
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