What makes a good financial strategy – or the “best investment”? Is it the one with the highest return potential or the lowest risk, or is it something more?
Ultimately, the best strategy may be the one that gets you to your destination. It all begins and ends with your goals – which is why we start with what matters most to you and then ensure our recommendations are aligned to help achieve those goals.
Discovering what matters most
When it comes to creating a financial strategy, it all starts with you and your aspirations. What does retirement look like to you? Would you like to contribute to a child’s or grandchild’s education? Are you hoping to leave a legacy for your family?
It can be overwhelming to prioritize the list when everything seems important. Our goal is to help you make sense of all you’re trying to accomplish, understanding what’s most important to you to help you see the complete picture.
Most importantly, we want to fully understand the “why” behind your goals: your purpose, as well as your motivations and the values driving them. Only then can we recommend a strategy personalized for you, helping to balance and prioritize all you’re working to achieve, to get you on the road toward achieving your goals.
Every goal has a strategy – and every account has a goal
You likely have multiple goals, each with a distinct purpose and time frame. Therefore, each goal should have a personalized investment strategy. This can help you:
- Fully define (and invest appropriately for) each goal – If your goal is retirement, what are your income needs? Do you plan to spend more time with family, or do you want to give back? By fully defining your goal, your financial advisor can then tailor a strategy to each goal, including the recommended asset allocation (your mix of stocks and bonds), balancing the return you need to reach it with the risk that may be appropriate to help achieve it.
With a longer-term goal, such as retirement, you may have more time to focus on growth-oriented investments. A shorter-term goal, such as purchasing a home or planning a wedding, may need a more conservative strategy to help ensure you have the money when you need it. Fully defining your goals and when you want to reach them helps us determine the appropriate allocation for each goal.
- Be clear about what you have for each goal – You likely have many different accounts. Since every investment should have a “why” (a reason why you own it), each account should have a purpose and be attached to a goal. This can help you see:
- How much you have allocated toward a particular goal
- If the allocation of these accounts, when combined, aligns with the desired allocation for the goal, as outlined above
- Track your progress and performance – Your strategy was designed to help achieve a particular goal. Therefore, the performance that matters most is the return necessary to work toward that goal. By evaluating both your progress and your performance relative to your overarching goal (versus any one particular account), you can better track your progress toward achieving your goal and if any adjustments need to be made.
- Understand the potential trade-offs of your decisions across goals – While each goal may have a distinct investment strategy, they do not exist in isolation. A decision about one goal can affect the others. For example:
- If you want to pay for your child’s education, how much more would you need to find in your budget to still retire “on time”? Or would you be comfortable working a few more years?
- How might your desire to leave a legacy for your grandchildren affect how much you can spend in retirement?
- What might be the trade-off between paying down debt and investing for retirement?
The trade-offs you consider could be large, or they might be quite small. Your financial advisor can illustrate different scenarios for you, helping you prioritize and balance your goals based on what is most important to you, and ultimately helping you make more informed decisions.
What about “Multipurpose” accounts?
While some accounts may have a defined purpose, others could serve multiple uses. For example, you may have a retirement account that you want to pass on to heirs, or a taxable account you’re using for retirement as well as some shorter-term needs.
In this case, think about the primary purpose for those assets: Will you use them primarily for your retirement, passing on whatever is left, or do you want to leave a specific amount to your heirs? At the end of the day, a dollar can be spent on only one goal: If you don’t know how much is dedicated toward a particular goal, it’s impossible to know if you’re still on track.
If you have two distinct purposes for the assets in an account and want to invest them differently, we recommend opening two accounts and assigning separate goals to each.
Your financial strategy is more than your portfolio
Your investment strategy is just one part of a comprehensive financial strategy. For example, other important parts of a retirement strategy include creating a sustainable stream of retirement income, having a plan to cover expenses such as health care, and ensuring you file for Social Security when it makes the most sense for you.
In addition, your strategy is not complete until you have a plan in place to help protect it should the unexpected occur. For example:
- Do you have appropriate emergency savings to prepare for an unexpected expense or a life event?
- Do you have insurance coverage for those risks you may not be able to cover financially, such as an unexpected death or a critical illness?
Your financial advisor can incorporate both what you want to accomplish and what could get you off track to help ensure you are properly positioned to achieve your goals.
Partnering together to achieve your goals
Setting your goals is not a one-time process. Your priorities will likely change over time, and your strategy should as well. It’s important to periodically review your goals with your financial advisor. By taking the time to understand what’s most important to you, and then focusing on ensuring your strategy is aligned with these objectives, your financial advisor can help ensure you remain on the road that leads to achieving your goals.
Scott Thoma co-chairs Edward Jones’ Investment Policy Committee and is responsible for Client Needs Research, the team that develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy.
He is a CFA® charterholder and a member of the CFA Institute and the CFA Society of St. Louis. Scott also earned the CFP® professional designation. He graduated summa cum laude from Southern Illinois University-Edwardsville with a bachelor’s degree in business administration, with an emphasis in finance. Scott earned a master’s degree in economics and finance from the same university.