Goals Based Investing – Look Both Ways Before Proceeding

Published by Curt Graham, Director - Manager, Products
July 20th, 2015

Curt_GBRAs we have read in previous articles and blogs, Goals Based Investing is a constant circle of plan/review/update plan/review, etc. Part of the initial plan contained expected future flows from the Goal Start date until the Goal End date and an expected/required rate-of-return for the portfolio. As Albert Einstein stated above, “the future is an unknown, but a somewhat predictable unknown.” We should expect some deviation in actual flows from the expected flows over time. This deviation must be reviewed when judging the current success, or lack thereof, of the goal portfolio.

Keep in mind that when the plan was initially formed, the portfolio was designed for a certain risk/return level to optimize the likelihood of reaching a future value on a specific future date, and the expected flows were an integral factor of that design.

The latest addition to the First Rate Goal Based Reporting package, what we call “Looking Back”, assists the manager and goal owner when reviewing the deviations between actual vs. expected flows, as well as actual vs. required returns. These two variances should explain the variance of where the portfolio is today versus where it needs to be to be on track to meet the goal. Curt_GBR2

We have included a Flow Accelerator factor for the expected future growth of the monthly flows. If the goal is funded by a percentage contribution from your salary, you would enter your expected yearly percent salary increase. The flow increase is realized in January. If the actual increases have been above or below this expected rate, that would account for part of the actual vs. expected flow variance.

Curt_GBR3After reviewing the past and assessing the current holdings for expected risk and returns, it is time to discuss altering the portfolio’s expected return to maximize the likelihood of meeting the initial goal, or, if circumstances have changed enough, whether a revised version of the goal is needed. This is what our “Looking Ahead” report does by providing the required rate-of-return from today to meet the original goal, plus the expected valuations on Goal End date if we increase or decrease that return by 1%.

While Mr. Einstein may prefer not to think of the future, when dealing with financial goals, I’d prefer to heed the words of Buckminster Fuller, for as Albert said, the future will be here soon enough.

About the Author: Curt Graham, Director in the First Rate Products group, joined First Rate in 1999. Graham is responsible for developing product enhancements and plays a role in the deployment of new applications in the First Rate Performance suite. Graham graduated from Ithaca College in 1981 with a Bachelor of Science in Business Management. Connect with Curt via LinkedIn.

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