How to Set Investment Goals and Leave an Enduring Legacy
KEY POINTS
Traditional goal setting often lacks an integrated approach and creates competing goals that are not well aligned
A legacy plan and related mission statement can form the cornerstone of your goal setting process
Utilize the SMARTER approach to convert good goals into legacy goals
Your success is dependent upon your ability to identify and align your BASE goals
Goal Setting - Traditional
You may have already tried setting your own investment goals with or without the help of a financial advisor. The process often starts with a discussion of your milestone goals (e.g., house, children’s post-secondary education, retirement). Then assumptions are made regarding cash flows, taxes, risk tolerance, time horizons, inflation, interest rates, and more.
These are all important parts of creating investment goals, but did the process ever leave you feeling like something was missing? The goals may be individually sound, but are they aligned? Do they serve a higher purpose?
This is where we differentiate an investment plan from a legacy plan.
An investment plan is a component of a legacy plan.
An investment plan is a key tool in developing an investment strategy capable of achieving your financial goals. This post is focused on developing such a plan. However, let’s take a moment and consider how an investment plan integrates into a legacy plan.
Goal Setting – Legacy Inspired
You may not have considered creating a legacy plan (financial or otherwise), but such is a worthy consideration.
In our post How to Create a Strategic Financial Plan we discussed creating a family mission statement and how achieving financial milestones is just one aspect of a legacy plan. A legacy plan takes a multi-generational approach to wealth stewardship and the family’s commitment to influencing society, culture, humanity, and the planet. Your wealth has the potential to sustain multiple generations of the family and their broader philanthropic endeavors. Philanthropy often becomes a natural extension of a legacy plan.
Success is measured through the family’s generational influence as opposed to focusing on the impact of an individual, and their solo accomplishments.
Does this sound out of reach?
It isn’t.
This perspective is usually considered the domain the wealthiest 1%. However, the 99% can excel at education, income potential, wealth generation, impact and influence on society, and eventually philanthropic endeavors. Philanthropy may take the form of modest measures in the first generation and evolve into a more robust strategy over time.
When looking at your finances through a legacy lens, creating wealth and stewarding it is important and should be well aligned with your philanthropic ambitions.
We mentioned the feeling you get when your goals are not aligned. A legacy plan and family mission statement can ensure your goals are always aligned.
For example, you may have four goals involving buying a vacation home, funding children’s post-secondary education, retirement, and making a large charitable donation. However, you may only be able to fund three of the four options.
How do you decide?
Answer: refer to your legacy plan and mission statement.
If your mission statement referenced the charitable donation, it may clearly guide you to forgoing the vacation home to fund the other three milestones. The benefits of a vacation home can be achieved by other means.
Goals … how do you set them? And what makes a good goal great?
Step 1 – Define Your Goal Methodology
The goals you establish will have a major impact on your legacy, wealth, relationships, and contributions to society and the planet. Studies have shown that individuals that set goals and track their progress are usually more successful than those that do not set goals.
A common approach is to reference the SMART approach¹. The concept was published in 1981 and aimed towards the corporate world as opposed to investments. However, its application is well aligned with investment goal setting.
Let’s breakdown each attribute of the acronym while adding two common additional attributes: E and R². We have modified each attribute to ensure better alignment with investment goal setting.
Specific
The goal must be significant, clearly defined, and well communicated. There should not be any ambiguity regarding the nature of the goal, why you set it, or what the expected outcome will be.
Measurable
There must be a quantitative basis of measurement.
Overall achievement of the goal may be broken down into increments measured over specific time periods. For example, an investment in real estate may include developing the property over a long time period. Each developmental milestone can be measured in terms of cost, quality, and time.
Certain aspects may be measured on an overall basis. For example, you may set an investment goal of requiring a certain performance return on your investment portfolio. Such is one measurement. You may also have a predetermined risk range that you want to maintain with respect to the investment portfolio. Asset allocation will have a significant impact the relative risk rating and include weightings related to currency, asset class, industry, among others.
Achievable
This attribute can be very challenging to satisfy, especially when creating goals with a spouse, partner, or within a broader family setting. Goals may seem lofty and unrealistic to some and completely attainable by others. The realistic nature of a goal should become clear as you work through the entire SMARTER process.
You will need to find your sweet spot between stretching yourself and setting yourself up for failure from creating unrealistic goals.
The original SMART acronym defined “A” as Assignable. Such is also applicable to investment goal setting. A goal may have many underlying objectives that must be met in order to realize the overarching goal. There should a clearly articulated assignment of responsibility for all aspects of the goal.
Relevant
The original SMART acronym defined “R” as Realistic. We chose to group such with Achievable noted above as we consider Relevant very pertinent to investment goal setting.
You will have a comprehensive and integrated investment plan if you have taken the time to develop a legacy plan and related mission statement.
Your investment goals should be aligned with your legacy plan and mission statement. As illustrated above within the vacation home example, investment goals created without integration into the family’s overall mission can lead to poor decisions.
Remember, you must always ask yourself “Why?”. Decisions flow much easier once you have the “Why” figured out.
Time
A goal needs to be time bound and tracked towards such end point(s). The likelihood of achieving your goal drops dramatically if it is not time bound. You also risk achieving the goal too late when such is no longer of value.
Evaluated
There are many participants involved in achieving your goals: you, your spouse, other family members, investments advisors, financial advisors, charitable organizations, volunteers, and others. You need to constantly evaluate your goals, progress, and your team. This process should be done on a set schedule (e.g., quarterly, semi-annually, annually) and may vary based on the type of goal. It may be necessary to implement ad-hoc evaluations to adjust to significant changes in circumstance.
Reviewed
It is important to clearly communicate the results of your evaluation with the appropriate team members. This creates a synergistic loop of goal setting, tracking, evaluating, reviewing, assessing and realigning your goals if necessary.
Let’s illustrate the SMARTER concept in action.
The Evaluated and Reviewed components of the SMARTER approach will take on more relevance as your estate planning becomes more complex. Such complexity will be driven by your increasing wealth, integration of goals that are competing for resources, coordinating multiple advisors, and including an ever-increasing number of family members.
Now that we have developed a methodology for defining a goal, it is now time to ask the question:
How do you choose which goals to pursue?
This leads us to Step 2.
Step 2 – Choose Legacy Defining Goals
Your financial goals are critical to achieving your financial milestones and for leaving a financial legacy. However, as described in our post How to Create a Strategic Financial Plan we encourage families to simultaneously set additional goals pertaining to the more qualitative aspects of their journey.
After all, legacies are built on more than mere wealth. You may never fully appreciate the profound impact your life has on family, friends, society, and the planet as you consistently embrace your values, principles, ethics, and traditions throughout your legacy journey.
Initially, goal setting can be a fun and creative exercise. However, it can quickly become overwhelming as you develop goals that compete for limited resources. Time and money are in finite supply. Add in the complexity of different perspectives amongst family members and you have a recipe for potential disaster.
Once you have created an initial list of goals, we recommend involving financial advisors to help incorporate them into an integrated financial plan. We invite you read our related post How to Choose a Financial Advisor - A Definitive Guide 2023
But first, you need to create your list of goals.
Before you write down a goal, you must ask yourself this simple question:
Why?
Sounds simple, but it can be difficult to answer. It becomes easier to answer if you have a family mission statement to guide you through the process. Do not worry, goal setting can be done without a mission statement.
Let’s reference the example above regarding the purchase of a house. As a stand-alone goal, buying a house to build equity and house aging parents / adult children appears to answer the question Why.
Unfortunately, those answers are incomplete. You need to drill down and answer the following types of additional questions:
Why buy a house instead of rent a house and invest the difference (see Should You Buy or Rent Your Home?).
Should I buy a house or invest the capital to start my own business?
What size house can we afford and still fund other goals (e.g., children’s post-secondary education, vacation home, retirement)?
How much lifestyle are we willing to sacrifice to purchase a house?
Does a home restrict my career aspirations and potential to relocate and experience life in another country?
How can we reach our charitable goals and maintain the ongoing expense of maintaining a home?
Goal setting matrix
We created a matrix to help guide you through the process. It will not eliminate the strain on your finite resources. However, it will provide a base from which to generate focused discussions between you, your significant other, and your financial advisor(s).
Click here to download a copy of the matrix Goal Setting Matrix. The following extract shows the integration of your goals into the SMARTER framework.
First, the matrix recognizes that your list of benefactors will likely grow in tandem with your wealth. Initial goals of saving for a house or a vacation, will evolve to include supporting your children, extended family, humanity, and the planet. Your support may include financial, volunteering, mentoring, advocacy, or simply setting an example and instilling your values into the lives of those you relate to.
Second, the matrix references the strategic planning required to provide a framework within which to set and develop your goals. As previously mentioned, we recommend each family draft a mission statement as a key initial step of their legacy plan. The mission statement may include, but is not limited to, health, spiritual, educational, relational, and operational attributes. A fully formed mission statement provides the guiding principles necessary to ensure alignment and achievement of short-term and long-term goals.
Third, the matrix refers to BASE goals. The BASE approach breaks down common goals into four groups: Bedrock, Accumulation, Safeguard, and Estate Transfer.
Bedrock Goals
Bedrock goals are aimed at ensuring you can sustain your day-to-day financial requirements. It starts with focusing on education (formal, informal, and continual). Knowledge and an ever-evolving skill set is critical to your vocation, starting a business, remaining competitive, and ensuring your earning potential is protected from automation. Your current income source may be sufficient, but consideration should be given to developing alternate supplemental income sources (passive and active). Regardless of situation, you need to create an emergency fund to weather future financial storms.
Accumulation Goals
Accumulation goals are a natural next step once Bedrock goals are established. We highlighted the most common accumulation goals. Your timelines and risk tolerance will vary by goal. For instance, saving for a post-secondary education may have a short time horizon and low risk tolerance. Whereas, saving for retirement that will occur forty years from now is a much longer time horizon and may allow for an elevated risk tolerance.
Accumulation goals can be broken into three categories, core, lifestyle, and other centric. Core goals are primary related to you and your family (e.g., house, wedding, retirement). Lifestyle goals are discretionary in nature (e.g., vacation home, milestone vacation, boat). Other centric goals are aimed at benefiting non-family members and the planet (e.g., charitable giving, endowment, foundation).
Bedrock goals and accumulation goals face risks beyond your control. Therefore, consideration should be given to Safeguard goals.
Safeguard Goals
Safeguard goals are designed to protect your assets and income earning potential. Financial advisors can guide you through various structural options available to protect your assets (e.g., LLC, LP, Trust). We invite you to read our post Starting a Small Business: Which Legal Structures Should You Choose?.
There are also various insurance products / policies designed to replace your income. Some provide regular payments while others pay a lump-sum (e.g., disability, business interruption, life).
Estate Transfer Goals
The Estate Transfer goals are a logical culmination of your accumulation and safeguard goals. Your attention will be drawn towards integrated estate planning as you age and your wealth and family grow. You can gift portions of your estate while you are alive. Alternatively, you can bequeath your estate upon your death. Your beneficiaries may include, but are not limited to family, friends, and charitable organizations.
Bottom Line
We recommend families spend the necessary time developing a well thought out and integrated legacy plan. The related mission statement will provide the guidance necessary to align your goals as they compete for your limited resources. Our BASE goals are fundamental to most families. Your goals can be powerful tools to fulfilling your dreams if you adhere to the SMARTER approach. A regular examination and review of your goal tracking performance and associated financial advisors is fundamental to success. Enjoy collaborating with your advisors and stretching your goals to the next plateau.
REFERENCES
¹ Doran, G.T. (1981). “There’s a S.M.A.R.T. way to write management’s goals and objectives”. Management Review.
² Yemm, Graham (2013). Essential Guide to Leading Your Team: How to Set Goals, Measure Performance and Reward Talent. Pearson Education.
