Goals-based investing can be a powerful tool to help investors clarify and meet their long term goals. Unfortunately, it's surprisingly difficult for investors to tell you about those goals. And without accurate goals, goals-based investing is a great way to reach the wrong target.
Let's look at the research into why eliciting goals is so difficult, and what you can do about it.
I'd like to ask you a simple question, one that advisors often ask their clients: What are your investing goals?
Please take out a notepad, or open up a text editor on your computer and write down your own goals for investing. Yes, I mean you, reading this blog post. Please take a moment and write them out — having them in your head isn't enough. Like this:
- Investment Goal:___________________________________________________
- Investment Goal:___________________________________________________
- Investment Goal:___________________________________________________
- Investment Goal:___________________________________________________
- Investment Goal:___________________________________________________
Got them?
Ok. Think hard about those goals – do they represent what you really value? You can change them as needed.
This exercise comes from the researchers Bond, Carlson and Keeney (2008). I discovered it thanks to Shlomo Benartzi's wonderful book, Thinking Smarter, on how to set and follow retirement goals. (In case you're wondering, yes, I'm trying to distract you right now.)
Next, look at the list of common goals in the "related" window on this page. Think about each one. Are these things that you value? How would you feel if you didn't achieve one of these? At the bottom of the list above, write down any goals you initially thought of and that aren't covered, so you now have a comprehensive list of goals.
Now, on the comprehensive set of goals (the common ones plus your additions), mark all of them that are important to you.
And finally, prioritize the goals you've marked, like this:
First Priority: ____________________________________________________
Second Priority: ___________________________________________________
Third Priority: ___________________________________________________
Forth Priority: ____________________________________________________
Fifth Priority: ____________________________________________________
For many people, this final list of high priority goals is quite different than their initial one. In fact, people often omit important goals when asked about them, and this occurs in many domains.
In the study by Bond, Carlson and Keeney (2008), the researchers found that when they asked MBA students to list their goals for business school, 79% of people omitted a top-5 item, and 35% omitted their highest priority goal in the first step of the exercise. That's right – over a third of the people didn't mention their own highest priority goal when asked about it. So Why Does This Happen?
