Defining good goals is a necessary first step to forming a financial or investment plan. Yet, people struggle to produce goals that reach beyond their immediate concerns. Goals hiding in our subconscious are often more important than what is top of mind, and it might be too late to act when they surface on their own.
Goal-based financial planning is quantifiably valuable
A study from the Journal of Financial Planning reveals that uncovering and prioritizing additional goals results in an estimated 15% increase in utility-adjusted wealth, or an alpha equivalent of 1.65%, compared to focusing only on retirement. In other words, simply creating a plan to fund all your most important goals has the same value as beating the market, without all the associated challenges, by 1.65% for the rest of your life.
This doesn't work if you can't identify a complete set of goals to prioritize.
We are empirically bad at setting goals
Simply asking clients what their goals are isn't enough to form a comprehensive plan. Top-of-mind priorities are rarely the most important from a long-term perspective. Due to the emotional nature of setting goals, the complexities of the financial decision-making process, and difficulties forecasting our future desires, we rely on mental shortcuts when making judgements about what's important. These blind spots and biases cause us to overlook goals that may have greater importance.
For example, investors who experienced an early string of good fortune might be more willing to take excessive risks. Clients who recently attended a housewarming party might prioritize buying a home. Others, who may have had a friend who suddenly fell ill, might focus on their health. Goals set in this manner feel like they are important in the moment but are quickly replaced months later.
Three studies published in 2008 found empirical evidence that decision makers are deficient in generating their own objectives. In each study, individuals failed to identify over half of the goals they later recognized to be central to their plans. The importance of the decision to be made didn't matter. Neither did giving participants plenty of time to ruminate or encouraging them to deliberate and talk through their decision.
Morningstar later reproduced the results in their own study. They asked 318 people to list and rank their top three financial goals. The participants were then given a list of goals that combined their answers with goals from a master list and asked to rank these goals in order of importance. Only 26% of all participants kept their original list of top three goals after seeing the combined list. Most people failed to determine their top goals on their own.
Later research found that both narrow and shallow thinking contribute to our inability to think of goals on our own. Presenting categories and the master list are two techniques that were found to help. The researchers issued a warning that, according to memory and motivation theories, presenting the aides too soon results in worse outcomes that are anchored on the examples provided.
Left Coast Makes You Think About Your Goals
Given the importance of having goals and the difficulty of coming up with your own, one of our jobs is to help you identify good goals. Our financial planning process involves a five-part workshop designed to help you overcome these blind spots.
Instead of simply taking your goals at face value, our process will challenge you to think beyond your immediate goals and support you through identifying those medium and long-term objectives that might be lurking in the background. Yes, you'll have to do some work, but the results will be well worth it.
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