Skip to Content

5 min read

How to Make Goal-Based Investing More Effective


Key Takeaways

  • A good portfolio is effective in achieving clients’ personal goals, not just beating industry benchmarks.

  • Many clients don’t know their true appetite for risk in relationship to their goals.

  • A simple 30-minute exercise in identifying clients’ underlying motivation can help personalize their goals.

Many investors struggle to articulate their intrinsic motivation, but financial advisors can unlock it with a simple goal-based investing exercise.

The question has been asked a million times: What are the three most important financial goals you’d like to achieve with your investment portfolio?

Investors typically share the same sentiments: Supplement retirement funds, put kids through college, maybe buy some property.

But is that really what they mean? And how, as a financial advisor, are you supposed to talk to people about something they should know, but don’t know, and probably don’t realize they don’t know?

It puts the advisor in a tough spot.

Let’s establish a few things first before diving into goal-based investing.

What Makes an Investment Portfolio Good?

Simple question, complicated answer.

The simple answer is efficiency—a portfolio that occupies the “efficient” parts of the risk-return spectrum. Harry Markowitz won a Nobel Prize for introducing the efficient frontier concept in the 1950s. For any given risk level, it is relatively straightforward to find the right mix of investments to optimize risk and return.

But the question remains, what’s the right risk level?

That of course depends on the investor. Efficiency is necessary, but it’s not sufficient for what constitutes a good portfolio. There’s just more to it than that.

A good portfolio is effective. It accomplishes the goals the investor originally set out to achieve. If you rewind however many years to the original advisor-client conversation, the good portfolio is the one that helped them meet the goals initially set.

A good portfolio is also endurable. If the investor can’t stick with the strategy over the long term due to their risk tolerance, their portfolio isn’t right for them, no matter how efficient it may be.

Finally, a good portfolio reflects the investor’s values to the degree that matters to them, while still also helping them reach their objectives.

In short, the good portfolio is both efficient and personalized to the client’s risk tolerance, goals and objectives, and values.

What Is Goal-Based Investing?

This is where personalized goals-based financial planning comes in, and goals turn out to be very valuable for many reasons.

Goals-based investing involves setting specific and challenging goals, prioritizing them based on necessity and time horizon, and regularly measuring progress and making adjustments. The focus is on maximizing the probability of achieving the goals, rather than beating a benchmark.

Goals-based investing aims to improve investor behavior and increase the likelihood of financial success. It creates benefits like:

  • A good benchmark to help people understand if they’re on track. Goals can be more meaningful than an arbitrary dollar amount.
  • A more personalized basis for comparison than market indexes. The portfolio isn’t designed to outpace the S&P 500—it’s designed to achieve the investor’s very personal goals.
  • An antidote to returns-chasing. A healthy focus on those goals can help curb bad behavior, like endlessly chasing short-term returns at the cost of long-term accomplishments.
  • Effective motivation. Research by Locke and Latham shows that people are more committed to goals that are personalized, important to them, well-specified, and realistic.

How to Get Personal with Goal-Based Investing

A simple three-step process will facilitate more meaningful conversations with investors about timelines, savings, risk tolerance, and trade-offs. It’s the foundation of Morningstar’s goal-based investing software.

It goes like this.

Step 1: Ask clients to spend three to five minutes identifying their three most important financial goals. Keep it casual. Then set their list aside.

Step 2: Ask clients to look over a common financial goals checklist. Something relatively general and applicable to most investors. Instruct them to tick off what they find interesting or motivating and cross off goals that don’t apply. This should take another five minutes. Set this list aside when they’re done, too.

This step is instrumental in breaking their problem apart. Investors no longer have to generate their own ideas about financial success. Instead, they can review common ideas and evaluate whether or not those ideas are important to them.

Step 3: Ask clients to take another stab at writing down their three most important, overarching financial goals. This time, make it a little more formal but don’t carve anything in stone.

What Does Goals-Based Financial Planning Accomplish?

Investors will often write down different goals in Step 1 and Step 3 despite the question being the same, Morningstar research shows.

About 25% of people write down something fundamentally different for their foremost, overarching, number one goal, and 76% of people change at least one of their three goals.

Why This Matters

This exercise is a gentle way to help people better understand themselves. It doesn’t confront their ignorance—it delights them a little bit and enables them to better articulate what motivates them. Here’s a great example.

In Step 1, people often write down “pay for incidentals,” but in Step 3, they write down something like “I don’t want to be a burden on my children.” Their response in Step 3 adds more context for a financial advisor and a lot more to work with when customizing a client’s investment portfolio.

To make financial goals more personal, investors have to be able to articulate where they want to go. As the financial advisor, the hard work is setting the table for that conversation.

What’s the Point of Goals-Based Investing?


Goals can be very emotional and personal. They help people answer the existential question, “Why am I doing this?” Investing requires people to delay indulgences and set money aside for the future, embracing uncertainty and patience. That’s not always easy to do.

Goals-based investing gives investors something to focus on. It’s specific and realistic. It provides a reliable foundation for measuring personalized success, and it’s been proven to increase client wealth by more than 15%, according to Morningstar research. Beyond their returns, investors derive a unique and personal satisfaction from goals-based financial planning, and that’s tough to replicate.

This article drew from a Morningstar webinar featuring Jason Stipp, director of product management, and Ryan Murphy, global head of behavioral insights. Watch the full webinar.

You might also be interested in...