How is it different?

The goals-based approach to investing is different as it represents a real shift in the way financial advice is given and the way investment solutions are designed. 

The traditional approach

  • Theoretical and quite complex
  • Solely focused on an individual’s risk profile, rather than what they want to achieve
  • An individual is invested in a pre-packaged investment solution that best matches their risk profile
The traditional approach

The goals-based approach

  • About developing a deep understanding of a family’s current and future liabilities, then constructing a portfolio that aims to achieve their financial goals using a mental accounting framework
  • Focuses more on total return outcomes or specific goals such as generating a reliable income stream
  • Risk isn’t viewed as outperforming or under performing a benchmark, it’s about will I fall short of my goals? What do I need to do to ensure I am on track to meet my goals?
  • Investment solutions are designed based on client research which helps to ensure they meet client’s goals
The goals based approach

The research behind behavioural economics

Economic models usually assume that people make rational decisions, however in reality decision making is not just based on facts and reason, psychology and sociology play a role too. Behavioural economics looks at why people may make irrational decisions and it relaxes the assumption that investors and markets are always rational.

In 2002, Professor Daniel Kahneman, of Princeton University, won the Nobel Prize for Economics, based on his work in the area of behavioural finance.

Kahneman studied how investors actually think and behave, rather than how financial theories and theorists suggest they should behave.

Behavioural finance can help explain why many investors tend to buy high and sell low, why they tend to become greedy when markets are approaching a top, and why they become fearful when markets are at or near low points.

The research behind the goals-based
The work of Kahneman and others helped form the basis for a new approach that is focused more on achieving investors’ specific financial goals and in doing so helps them stay on track.

Important notes

While every care has been taken in the preparation of this information contained in this website, neither AMP Capital Investors Limited (ABN 59 001 777 591)(AFSL 232497) nor any member of the AMP Group make any representation or warranty as to the accuracy or completeness of any statement in it including without limitation, any forecasts. This content has been prepared for the purpose of providing general information only, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making any investment decisions, consider the appropriateness of the information on this website, and seek professional advice, having regard to their objectives, financial situation and needs. Content sourced from Cuffelinks and Livewire does not represent the views of AMP Capital or any member of the AMP Group. All information on this website is subject to change without notice. 

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