Stop Guessing, Start Achieving: The Power of Aligning Your Capital with What is Important to You

Posted: 3-17-24 | Drew Boatright

Most successful companies have a thoughtful vision and mission statement as a North Star that points them towards where they want to be in the future. Creating a similar truth to drive your personal financial life is just as important.

What is Goals-Based Financial Planning?

Picture yourself on a scenic road trip, wind in your hair and the promise of adventure ahead. Now, imagine navigating that journey without a map. That’s often how our financial lives feel—investing, saving, and budgeting without a clear destination. Goals-based financial planning is a game-changing approach to creating a GPS to align your finances with your ambitions.

If you don’t have a purpose clearly defined for your wealth, it’s really hard to make good decisions. Say goodbye to generic “60/40” portfolios; goals-based planning puts you at the center. It’s time to align your financial strategies with your unique aspirations and dreams, making your money fuel your individual goals.

Defining Your Financial Goals & Aspirations

At Innovia, we help clients divide their goals into three distinct buckets and use our asset allocation framework to assign resources to each of them:

  • Protective:These are your non-negotiables, the financial bedrock securing your peace of mind.
  • Lifestyle:This is where the fun begins! Picture vacations in exotic locales, comfortable retirements, and supporting your children’s education.
  • Aspirational: Ever dreamt of starting a business, writing a novel, or trekking through the Himalayas? These ambitious goals may seem distant, but we’ll map a path to reach them.

Defining goals according to these three criteria helps to get to the core of someone’s true values as the first step in developing a holistic financial plan. This goals-based wealth allocation framework enables you to work simultaneously toward achieving all three goal categories; it centers your investments around your life plans as opposed to relying on returns to drive your lifestyle.

Categorizing Your Assets

Once you know where you want to go, the next step is to identify your starting point to establish where you may need to rebalance your allocation. This includes looking at your current balance sheet, assessing your assets and liabilities, determining your net worth and then assigning a range of assets to each of the three buckets.

Create Your Goals-Based Portfolio

Protective Goals

Addressing your protective goals will help provide security and peace of mind. It really comes down to “How much money do I need in order to sleep well at night?” The answer is going to be different for everyone, depending on age, current asset level and ability to stomach risk.

Assets in the protective would include checking and savings accounts with sufficient funding to provide a cushion to meet cash flow needs for several months in case of an emergency, as well as insurance policies and personal property.

A protective investment portfolio would include cash and/or cash equivalents, fixed income instruments, including US Treasuries and semi-liquid private debt.

Think of protective goals as similar to the foundation of Maslow’s hierarchy of needs. At the base of the pyramid are protective goals, which relate to physiological needs and your sense of safety and security.

Once you have built a strong foundation and addressed your protective goals, you can move on to the lifestyle and aspirational.

Lifestyle Goals

This section of your wealth management plan addresses where you want to be in the near future and is subject to market risk. Ask yourself, “What do I want my life to look like 10 years from now and what do I have to do today to realize that?”

Assets for realizing lifestyle goals include 401(k)s, IRAs and other retirement accounts and educational accounts. Inheritances and other generational wealth would also be considered in this bucket. The portion of the portfolio allocated to lifestyle investments would include both domestic and international public equity as well as semi-liquid private equity and real estate.

Aspirational Goals

Aspirational goals are more pie in the sky. This is where we run scenarios like, “If you had a week to live, what would you regret not doing?” Or “If you had all of the money in the world, what would you do that you can’t do now?”

Current assets that could be applied to aspirational goals would include concentrated stock positions, private business ownership and investment real estate. The portion of the portfolio would aim to earn higher returns that would allow you to fund your aspirations, whatever they might be.

Portfolio components would include private equity with illiquid capital call structures designed to provide outsized returns. The downside to these investments is that they lack the easy liquidity found in the public markets.

The Pitfalls of Traditional Asset Allocation

Unfortunately, it seems that very often in the financial industry, clients adjust their goals to suit the plan rather than the other way around. Too often, an advisor will input a new client’s relevant information from the first meeting and a few weeks later calls up to say, “We calculated your risk tolerance and created this 60/40 portfolio for you that should do okay. See you in a year for a checkup.”

The major problem is that while that traditional 60/40 portfolio “should work,” it won’t in all scenarios. Especially as we saw in 2022, when both equity and fixed income experienced volatility, if the client does not understand the purpose behind their allocations, they will likely want to change the portfolio at the worst possible time.

Financial Planning for Peace of Mind: Your Goals Come First

Clients are unlikely to adhere to a plan that is only about dollars and cents but has no connection to their goals. If the client has no real understanding of the “why” behind their asset allocation, they are likely to panic and feel an overwhelming need to do something in times of trouble.

In reality, if their goals have stayed the same, their plan should remain the same. Goals-based planning helps clients connect two things—their portfolio and the things they want that portfolio to fund.

If you would like to learn more about Innovia Wealth’s goals-based allocation framework and how our planning process can help secure your financial future, start the conversation by contacting us or scheduling a 15-minute introductory visit to discuss your goals today.

About the Author: Drew Boatright, CFP®, CAIA

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