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Goals Based Investing for the Middle Class: Can Behavioral and Traditional Financial Policies Simplify Investing and Maximize Wealth?

In goals based investing, the client defines his goals and a portfolio is designed to meet each goal. This contrasts with traditional portfolio planning which relies on a risk tolerance questionnaire to design an optimal overall return for the client’s risk tolerance. The goals-based approach is designed to address behavioral issues like loss aversion and counter-cyclical movement and to make the risk of a portfolio more relatable. Some of the mental accounting tricks that support goal based investing support increased savings and improved risk understanding. However, separating the portfolio into different buckets poses issues as well. Returns may be sub-optimal, individuals may still turn to credit instead of savings when faced with an unplanned expense, and goals change. Accounts that are specifically designed for a goal, like 529 plans for college savings, are not always the best method for a middle class investor to save for the goal. The purpose of this paper is to identify research opportunities to combine goals based investing and traditional finance to encourage wealth attainment for the middle class. Replicating the analytical methods used in retirement research to ascertain safe savings rates, withdrawal rates, and guardrails can form a baseline policy for asset allocation and location. Reframing goals and using different terminology may help the middle class investor obtain wealth and respond appropriately to adverse financial situations.