Creating a Goal-Based Financial Investment Strategy

A goal-based financial investment strategy sets you on a path for better wealth management. Using goals helps you match your time horizon to your asset allocation, which means you take on the optimal amount of risk. By setting specific goals, you are more likely to achieve them.

Goals allow you to bucket your money according to its purpose; for example, long-term funds should be invested strategically to meet specific goals. With each goal, a financial advisor can help you select a portfolio of stocks and bonds customized for the time horizon you set.

Creating a roadmap

Once you have solid answers about your retirement preparedness you and your financial advisor may consider other objectives that impact your financial future.

Investors who face today’s financial realities squarely and make sound, research-based choices still have the power to maintain their desired lifestyle through retirement. It’s crucial to perform a thorough analysis of your current financial situation and long-term goals to create a comprehensive and effective financial plan. Determining your risk profile and personal goals will help identify the right asset allocation and location.

Asset allocation and location

Tax efficiency is essential to maximizing returns. Many investors don’t understand how to manage their portfolio to minimize their tax burden because investing and understanding U.S. tax laws can be complex.

A central problem is how to efficiently invest funds held in taxable and tax-deferred accounts. You must make both an optimal asset allocation decision (how much of each asset to hold) and an optimal asset location decision (which assets to hold in the taxable and tax-deferred accounts). These decisions should help you reduce the tax burden of owning financial assets while maintaining an optimally diversified portfolio over time.

Asset allocation

You can help minimize your risk and potentially increase returns by allocating your investments among different asset classes. Equities have the highest potential return but also the highest risk, whereas treasury bills have the lowest risk because they’re government-backed but provide the lowest potential return.

As each asset class performs differently, investors should consider their risk tolerance, investment objectives, time horizon and available capital as the basis for their asset composition.

To determine the asset allocation mix that’s right for you, it’s typically advisable to create a series of model portfolios, each comprising of different proportions of asset classes and matching up with a particular level of investor risk tolerance. In general, model portfolios range from conservative to very aggressive.

Asset allocation over a wide range of investment styles, accommodating varying risk tolerance, time frames and goals is a fundamental investing consideration because it helps you maximize profits while minimizing risk.

Asset location

This tax-minimization strategy leverages the fact that different types of investments get different tax treatments. Using this strategy, you can determine which securities should be held in tax-deferred accounts and which should be held in taxable accounts to maximize after-tax returns.

To benefit from this strategy, you must have investments in both taxable and tax-deferred accounts. Investors with assets split between taxable and nontaxable accounts and with similar asset mixes will get the largest benefit from asset location.

With a balanced portfolio, you might hold investments in taxable and tax-deferred accounts. Although your overall portfolio should be balanced, each account does not need to have the same asset mix. You ignore the tax benefit of properly placing securities in the type of account that will assure best after-tax return if you create the same asset allocation in each account.

The location of a security is determined by how it is taxed. Under the tax code, dividends and capital gains get favorable treatment. For investors in the highest tax bracket, interest income is taxed at a 37% rate, while the tax rate for dividends and capital gains ranges from 0-20% depending on tax bracket. Investors receive lower tax bills when holding stocks or equity mutual funds within a taxable account because most equity investments generate returns from both dividends and capital gains. But you would be taxed at the ordinary rate of up to 37% on those same capital gains and dividends if you withdrew them from a retirement account in which taxes are paid on the withdrawal of funds.

Asset location is a strategy that determines the proper account to place investments in to get the most favorable tax treatment overall and does not replace asset allocation. It adds to the overall after-tax return. The best location for a particular security depends on an investor’s financial profile, prevailing tax laws, investment holding periods and the tax and return characteristics of the underlying securities.

Seek the right level of diversification

Warren Buffett once said the number one investing rule is to not lose money. Diversification is one of the best ways to follow this rule.

Mutual fund portfolios composed of a mix of both stocks and bonds are referred to as “balanced” portfolios. The specific balance of stocks and bonds is designed to create a specific risk-reward ratio that allows you to achieve a certain rate of return on your investment in exchange for your willingness to accept a certain amount of risk.

Diversification might seem like an easy objective considering that so many investments are available, but you still need to make smart choices for your diversified portfolio. Keep in mind that it’s also possible to over-diversify your portfolio, which can negatively impact your returns. Too many investments in a portfolio can reduce the effect of your investments, and an overdiversified portfolio often begins to behave like an index fund.

Regardless of your means or method, keep in mind that there is no generic diversification model that will meet your needs. Risk tolerance, investment goals, financial means, your level of investment experience and your time horizon will play a large role in determining your investment mix. The first step is to figure out the combination of stocks, bonds and cash that will be required to meet your needs. From there, we can ascertain exactly which investments to use to complete the mix, substituting traditional assets for alternatives as needed.

The advantage of a single trusted advisor

Using multiple advisors can create asset allocation, diversification and/or tax sensitivity issues as well as increase overall fees. 

Different brokers using different wealth management strategies can result in pitfalls that may cut into your returns and undermine your goals. A better solution is to engage one investment manager who can pay closer attention to possible imbalances or opportunities and relieve you of the burden of monitoring activities for which you might not have the ability or time.

Bottom line

Begin by identifying your goals and creating a detailed financial plan of your current investments, investment style, risk tolerance and financial objectives. Associated Investment Services can recommend a financial strategy tailored to your short- and long-term goals. Our financial consultants have the experience to help you make prudent investment selections for every stage of your life. You can receive a complimentary financial review with no risk or obligation.

Learn more about Associated Bank Private Wealth.

Speak to one of our financial professionals or call 800-595-7722.