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Financial Planning

The Importance of a Road Map in Reaching Our Financial Goals

Goal-Based Investing is all about knowing where you are in relation to your destination.

One of my favorite movies is Vacation, starring Chevy Chase as Clark Griswold. The story concept is quite simple. Clark has a goal in mind and drives his family to Walley World from Chicago to see a bit of America along the way. A quiet cross-country drive would not make for an entertaining movie, so the family encounters outrageous obstacles and problems along the way.

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Throughout the movie Clark is determined to reach his goal no matter what unfolds. It’s the same mental perseverance we all need when we create a financial goal. When we are caught up in the moment and distracted by personal or world crises (such as crashing your family truckster in the desert), it is easy to lose sight of the big picture. This is where financial professionals or investment management tools can help you make the necessary course corrections and adjustments along the way.

When we think of goal-based investing, it begins with determining if this is a long-term or short-term objective. The strategies underneath should be quite different, and many make this mistake when they use a single allocation and risk tolerance across all of their investment plans. Risk tolerance is a measure of how much volatility or market movement one might be comfortable with. As a guideline, the shorter the time until reaching the goal, usually the more conservative the portfolio.

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Longer-term goals might be education planning or retirement. It may be 15 years or more before needing access to these funds. Shorter-term goals could be things like saving for the down payment on a home, a family vacation, or a new car. Typically these are targets of five years or less. The shorter the duration, the more a single event in the financial markets could have a major effect on your plan.

Ideally you would start with an initial amount to invest, a monthly contribution, and the time in the future when you will withdraw the funds for your goal. Having an online tool, or a trusted professional, to track progress is very important.

In its simplest form, you should know if your plan is on track “green”, or off track “red." When it turns “red” because of a market event, you will be alerted. If it is a short-term goal, you will likely be presented with three simple options to get back on track:

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  1. Add more money to the account or increase the monthly contribution
  2. Extend the time until the funds will be withdrawn
  3. Scale back the goal

Your adviser, or planning tool, should be able to run through scenarios indicating the best option for you and the right mix of these three choices to get you back into the “green” taking into consideration your risk tolerance specifically implemented for this plan. The opposite may also happen when better-than-expected returns boost your chances of hitting your goal early. In that instance you might make changes allowing you to reduce monthly contributions or scale back the risk.

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What gets in the way? Most often it’s ourselves. We get distracted by noise from the news media, a comment from one of our neighbors, or overanalyzing the underlying investments. Take a look at your current portfolios and ask yourself if you have identified a specific goal for each one, or if all of your investments are grouped into one account. It will be an exercise well worth it should anything unexpected happen along your journey. Working with an objective financial professional can help keep us headed in the right direction and correct course as needed.

This summer if you are heading out on vacation, no doubt you have planned ahead. Think of the level of detail that went into booking rooms, buying tickets, or bad weather contingencies. Hopefully the park will be open when you get there, whether it’s Walley World, Disney World, in Paris or near the Grand Canyon. Shouldn’t your money receive that same sort of planning and attention?

Kevin Kaplan is a partner at Silicon Hills Wealth Management in Austin, Texas. He is passionate about photography, travel, pizza and live music.

About the Author

Kevin Kaplan, RIA

Partner, Silicon Hills Wealth Management

Kevin Kaplan is a partner at Silicon Hills Wealth Management in Austin, Texas. He is also co-founder of Bundl, an automated online investment platform. A native New Yorker, Kevin has also worked for several large information technology firms and ran a successful fine art photography gallery. He is a world traveler, live music fanatic and a fan of 1980's pop culture.
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