During periods of market volatility such as the current one, retail investors often find themselves glued to portfolio apps, trying to minimize losses and maximize returns. They track headlines, chase sectors in favour, monitor volatility spikes and follow social media tips, often leading to panic selling during market declines or buying into rallies at elevated prices.
Investors in such phases are usually driven by two primary emotions—greed and fear. While acting on these emotions may offer short-term gratification, it often creates a behavioural gap. Investors pull money in or out during corrections instead of staying invested long enough for their portfolios to recover.
The old investment wisdom says markets should move money—not investors. That is where goal-based investing comes in, helping investors avoid this behavioural gap.
Goals first
Goal-based investing is an investment approach in which a portfolio is built around specific life goals rather than market trends or benchmark returns.
The approach is driven by three core components:
- Target amount (how much money is needed)
- Time horizon (how long the money can remain invested)
- Risk tolerance, or how negotiable the goal is
Consider two examples—retirement and a home down payment.
Retirement requires a large corpus, typically has a 20-year investment horizon for someone who starts early, and is largely non-negotiable because it cannot realistically be postponed.
A home down payment, on the other hand, requires a fixed sum over a shorter period of two to five years. While the purchase may be delayed, the required corpus cannot afford a shortfall because housing prices may continue to rise.
Goal-based investing encourages investors to build portfolios around these three questions rather than around market predictions. It also allows flexibility, enabling portfolios to evolve as life goals change over time. In goal-based investing, investors remain anchored to a life goal rather than to market corrections.
It also provides a more meaningful lens through which to evaluate investments. Instead of reacting to market volatility, investors assess whether the probability of achieving a particular life goal has changed and adjust their portfolios accordingly.
This approach also dispels the misconception that every investment must generate annual returns of 15-20%, regardless of its purpose.
Instead, investments are aligned with the timeline and flexibility of each goal. A retirement goal that is 20 years away requires higher growth to beat inflation, whereas a goal only two years away requires capital protection rather than aggressive growth.
Bucket approach
This naturally leads to the bucket concept.
Under this approach, investors mentally—or literally—divide their investable surplus into separate buckets, with each bucket representing a specific financial goal. Every bucket has its own time horizon and degree of negotiability instead of simply chasing the highest returns.
These factors determine the target corpus for each bucket and help investors choose the most suitable investment product—whether equity, debt or a combination of both. Allocations can then be adjusted based on the likelihood of each goal being achieved.
Using the earlier examples:
Retirement (long horizon, low negotiability): Equity is generally the most suitable starting point, with a gradual shift towards debt or hybrid products as retirement approaches.
Home down payment (short horizon, moderate negotiability): Debt instruments and fixed deposits are more appropriate because there is limited time to recover from market declines.
Once investors allocate their surplus across these goal-specific buckets, market corrections no longer affect every part of their portfolio in the same way.
Handling volatility
The next natural question is: how should investors respond when market volatility appears?
In a non-goal-based approach, investors may feel compelled to exit the market, fearing that losses will deepen.
In contrast, goal-based investing interprets volatility differently. Long-term equity buckets are expected to absorb market fluctuations, while short-term debt-oriented buckets remain relatively insulated.
Research has shown that investors following a Systematic Investment Plan (SIP) are generally less vulnerable to emotional reactions during market ups and downs because they remain focused on the probability of achieving their goals rather than responding to temporary market movements.
Stay disciplined
Market movements do not change the milestones attached to your financial goals—and those milestones are what truly matter.
Markets react to headlines. Milestones simply wait to be achieved.
In goal-based investing, the key question is whether each goal remains on track and what the probability is of achieving it within the desired timeframe.
So before checking the market news today, it may be more worthwhile to define your goals, establish their timelines and assess the amount of risk you are willing to take to achieve them.
Don't chase the markets. Chase the milestones.
Garima Gulati is executive director at Client Associates.