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The Power of Planning

The wealth management industry has historically measured its success by whether its products outperform the market. It’s somewhat binary — if your portfolio outperforms: success. If it underperforms, you’re owed an explanation.

For years this has left me cold, because it feels like an academic exercise that really has nothing to do with you. Sure, it’s gotta be better to outperform than underperform, right? But does this necessarily mean you can reach your goals? Retire well? Start that business? Afford the big splurge? Maybe, I guess, could be, I don’t know.

And, unfortunately, neither do you.

This is where Ellevest comes in because, like you, we’re planners.

At Ellevest we approach the puzzle of investing completely differently. We didn’t set out to beat the market, but rather to help you achieve what you actually want in life through something we call “goal-based investing.” (I know, what a wonky name, right? I’ll send a Bouq to anyone who can come up with a better name. We’ve been wracking our brains for one.)

Here’s how it works, and why we do it:

Turning Your Next Big Idea Into A Real Plan

Say you want to start that business in a few years. You hang out on the sofa watching Broad City, drinking an oaky Chardonnay, and dreaming about it. For argument’s sake, based on that level of effort, let’s say that your chances of starting that business are about 15%.

A few days later you tell a friend your idea, and she loves it. She gives you a motivational speech about how amazing the business is, how it’s the perfect blend of your interests and experience. How you’re going to change the world with it, and how you’re finally going to be able to tell your boss to “take this job and shove it.” You’re fired up!

But your chances of actually starting that business do. not. budge. Yeah — weird, right? The research indicates that being motivated doesn’t increase your chances of achieving your goal. At all.

Fast forward a week or two later and you’re still fired up, so you decide to write down your vision. The British Journal of Health Psychology conducted a study in which 91% of participants who wrote down a goal (in this case, a goal to exercise) actually achieved it. As for the participants who didn’t write anything and just read pamphlets on the benefits of exercise for motivation — only 35% ended up working out.

So, you jot down that you are going to start your business, what the business is going to be (let’s say it’s a cutting-edge UX design firm), and when you are going to start it.

Now that you’ve got your plan down on paper, it’s time to figure out how you’re going to make it happen.

You’ve Got a Plan...Now What?

Here’s the thing: Starting that business you’ve been dreaming about — and finally wrote a plan for — isn’t as easy as simply starting to exercise. It requires money. So the next step is figuring out how to pay for it.

Saving is one option. There’s no risk involved, which probably sounds pretty good, right? But wait — with interest rates on savings accounts awfully close to 0% these days, simply saving your money means you’re not moving toward your goal; instead, you’re actually losing ground, once inflation is accounted for.

You could invest and try to beat the market instead. As noted, this is what a lot of investing firms aim to do; but, as a group, they don’t actually achieve this. (Instead the aggregate of these firms underperform the markets by the amount of their fees. And a study from S&P Dow Jones Indices found that less than 0.1% of fund managers outperformed the market over a five-year period.)

That’s not to say you couldn’t make enough money to start your business this way. You can see some pretty great returns if you outperform the benchmark in strong markets. (Again, that’s if you outperform the market.) So you could have more money to spend on your new business — think extras like fresh flowers at the reception desk every week — if the market is doing really well.

But in weaker markets, beating the market isn’t likely to do much for your investment portfolio. Let’s say the market is down 20% for the year and you’re only down 10%. Sure, you’ve outperformed the market, but it’s likely that you aren’t any closer to having enough money for your business. And isn’t that why you invested in the first place?

This is where Ellevest comes in because, like you, we’re planners. That’s why the first thing we do when you sign up is create a customized investment plan — for free — specifically designed to help you reach financial goals like starting your own business (and retirement, buying a home, raising kids, etc.). Kind of like how writing down your goals can increase your odds of achieving them, we think having an investment plan at your fingertips makes it easier for you to own your finances.

Investing to Help Make It Happen

Part of your investment plan includes a personalized investment portfolio for each goal that’s built with one simple objective: getting you to your goal, or better, in 70% of market scenarios — weak and strong. Think of it as a leg up since other digital advisors focus on getting you to your goal in only 50%–60% of markets...so “average” or “slightly better than average”.

But you’re investing to start your own business and deserve more than average or slightly better than average confidence in your future.

We work hard to give you that at Ellevest. From the investments we choose for your portfolio to the deposits we recommend, we’re shooting for success within your desired open-a-business (or other goal) timeline in most markets. Oh, and one important point on the 70% probability: In markets where you fall short of your goal, lengthening your timeline or investing more money could help you make up that shortfall.

Suddenly, the future looks less hazy, right?

If you’re wondering what goes into your goals, check out the straight-to-the-point “What Goes into Your Goals” next.

Disclosures

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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