Your Portfolio: Good Servant; Poor Master

by Jonathan G. Cameron, CFP®

Having great investment portfolio returns may not get you to your retirement goals. You could have (in theory) spectacular returns every year for 20 years and still not realize the retirement you want. Do we like strong investment performance? Sure. Should stellar performance be your goal? Not necessarily.

Why? Here is the takeaway: Goals-based investing should be the approach.  The investor starts from the endpoint and works backward toward today.

In doing retirement planning, first begin with the lifestyle you want to enjoy.  Then figure out how much it’ll cost you.  Then evaluate your current investments to see if they’ll do the job.  Your portfolio return in this approach becomes the means, not the end.

This approach is very different from performance-based investing, where you pick the top performing fund or funds for your portfolio as the first order of business.  This approach looks at past performance, which is not necessarily an indication of future results.

There is a crucial distinction here. The latter is what most people end up focusing on, sort of intuitively, because who doesn’t want to invest in the top performing fund in its category?

So why don’t more people take a goals-based investing approach?

Bottom line: It’s hard. It takes two steps instead of one. It is easier to choose an investment or portfolio without a clear, thought-through strategy than it is to make a plan to achieve what you want. And when I say strategy, please note that “Retirement” is not quite a strategy. Retirement is a nebulous term that is thrown around and can mean a lot of things. (You can read more about our perspective on retirement in our article, “Retire to What?”)  Typically when doing retirement planning we ask our clients questions such as, What are your objectives? What do you want to accomplish? How much do you need to live on? Is extensive travel part of the retirement picture?  The answers to these questions get to the heart of the client’s objectives.  From the client’s objectives we develop an investment strategy.

The sequence of planning events, then, becomes very clear:

  1. Identify the lifestyle you want. This is your objective.
  2. Look at current investments as a strategy toward achieving those objectives.

The end, ultimately, is you the client achieving your personal goals or objectives in retirement. That’s why portfolio construction is informed by your goals, and not vice versa.  In this way you turn your money into a good servant, instead of letting it become a poor master.

Jonathan G. Cameron, CFP®

Photo by Dakota Roos

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