Why You Shouldn't Start with Goals

Instead, determine your right amount of risk.

Have you noticed that goal setting is everywhere, especially SMART goals - goals that are S-pecific, M-easurable, A-ttainable, R-elevant, and T-ime bound?

Sure, this methodology of setting a SMART goal makes sense for aspiring to improve your fitness or to develop a new skill or for self improvement in any area.

This does NOT work for wealth services, and yet this industry is full of financial advisors who will begin their work with you by sitting down to determine your goals.

Here at WealthFactor, we see some flaws in this method, and therefore we approach the topic of goals from a very different angle.

When we say we don’t start with goals, we mean just that.

Rather than you having a goal in mind (like retiring to a tropical place, or leaving a huge legacy to your grandkids), and then finding a way to get you there, we instead start with measurable data to see exactly where you are beginning from.

Remember, we are real-ist experts, who avoid unnecessary risk (because it leads to an increased probability of failure) and we operate within our philosophy called RiskSmart (learn more about that in this Insight post) - we always start with an evidence-based, foundation of realism.

How? By determining your capacity for risk, specifically structural and behavioral risk.

Structural risk measures your ability to absorb financial losses without putting your financial objectives in jeopardy.

All the data points that make your situation unique to you determine your structural capacity for risk, including:
 - Your age (which plays less of a role as wealth increases)
 - Your current assets
 - The time horizon (how long until retirement or large life changes)
 - Current activity on your accounts (what draws do you currently have)
 - Other sources of income (such as social security or a pension)
 - Significant health care needs (for someone in your household, or yourself)

These items are the closest to constants we have in the equation of your wealth and your risk capacity.

Behavioral risk measures your tendency to make investing mistakes due to your behavior or psychology. For instance, how well can you withstand the downside volatility of the market or do you panic and make a decision that is reactionary? There is a large body of evidence from the field of behavioral economics on the biases of investors and common investing mistakes.¹

At WealthFactor, we determine what your behavioral capacity for risk is and use that data to help you make informed decisions.

There are two ways to decrease behavioral mistakes:
1 - Through detailed understanding, education, and expertise
2 - Through coaching

WealthFactor’s experts can assist you with both!

Once we’ve evaluated your structural and behavioral risk and assigned each a score from 1 to 100, the lower of these two scores becomes your MaxRisk score. This represents a limit on the amount of risk we recommend for you for a long term investment.

Next we allocate your investable assets into growth and stability buckets, filtering as needed to create a personalized index for your unique situation.

If you’re interested in digging into the specific details of our investing philosophy, you can read about it here in this recent Insights post.  https://www.wealthfactor.co/insights/approach

There is a place for goals in our methodology. It just comes at the end.

See, the biggest negative to centering on the goal first is it removes the focus from the parts you can control that will impact your success.

The focus needs to be on things that are defined and controllable.

We don’t have control over the markets and what they produce. Simulations are rooted in the unknowable. There’s more that is unpredictable than predictable. To approach a portfolio with a return target isn’t effective.

¹Thinking Fast and Slow, Kahneman, 2001. / Misbehaving: The Making of Behavioral Economics, Thaler, 2016.


What you can focus on is your structural situation and then filter your probability of your behavioral mistakes over the top of that. These should influence how much risk you take and determine how you invest. Goals come after that!



It’s ok if you have.

But maybe it’s time to revisit the approach you’ve taken with advisors in the past and rework your portfolio from a risk perspective. Perhaps you’ve taken on more risk than is necessary and you’re paying higher fees as a result.

Start here with our RiskScore tools, so begin to determine your right-fit risk capacity.

RiskScore: Behavior   RiskScore: Structure

Recent Insights