InvestmentsOct 23 2015

Investing towards a goal

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Investing towards a goal

Let us take a trip into history to a time when banks were not widely used by the masses. Every payday, an individual would take some cash from his salary and add it to various envelopes or little earthen pots labelled with different goals.

There has always been an aim behind saving money. If we still had those pots the labels would say things like ‘household expenses’, ‘children’s education’, ‘daughter’s wedding’ and ‘retirement fund’. But the modern world of financing has enabled consumers to leave those clumsy envelopes and break their earthen piggy banks and deposit their money in banks or invest it in funds.

While some people save with a particular goal in mind such as buying a house or building a retirement fund, others save with the aim of getting higher returns. Human behaviour is driven by incentives and while setting a goal can help them to save in a disciplined fashion, it also helps adults completing their goals.

Bad habits

But we need to save more. A number of surveys and research reports have highlighted the poor saving habits of UK adults. For the majority, saving is the biggest priority, according to a survey conducted by BlackRock, followed by investing for a comfortable post-retirement life and paying off credit card bills and other debts.

While the majority simply like to invest to save and grow their wealth, smaller goals such as paying for a home, starting a business, providing financial support, financing children’s education were also prominent in the results.

In recent years, goals-based investing has become popular. In simple terms, it involves a methodology where investing is based on the needs or goals of a household or an individual. Analysts have said that financial advisers have been practicing goals-based investing for years now but the methodology has become more popular ever since the financial crisis when many investors lost money.

“I think a lot of people got hurt during the financial crisis and the funds they were in gave them capital losses which were higher than expected,” says Alex Farlow, head of risk-based solutions at Square Mile Investment

Since then, financial advisers and fund managers use goal-oriented funds to make it easy for investors to understand their priorities and match them with their risk tolerance.

“We describe the kind of goal outcomes-based investing in terms of putting the client at the heart of the investment decision rather than the investment company driving the outcome,” Mr Farlow says.