How to Build a Portfolio to Reach Your Financial Goals

Investing is fundamentally an exchange of spending power today for the attainment of a goal in the future. Building a portfolio to meet these goals requires a long-term perspective, a commitment to deep research, and a willingness to think (and act) independently. We share some thoughts on how to build a successful portfolio that meets these future needs.

Investing Starts With Setting Financial Goals

When it comes to portfolio management, many investors may want to jump straight into asset-allocation conversations. These investors are making the mistake of neglecting a key aspect of what defines a good portfolio: financial goals. Without the right goals in mind, investors cannot know their risk capacity or time horizon; therefore, any conversations about asset classes or market opportunities are moot.

Our research indicates that investors may struggle to identify their financial goals because of behavioral biases inherent in the goal-setting process. We recommend taking the time to systematically understand your financial goals by following a vetted aid, such as the three-step process we lay out below. In our research, we found that this simple process is effective in helping people better articulate and identify their financial goals.

Once investors uncover their financial goals, they can quantify those goals and define their time horizons. Investors can think of these items—accurate goals, quantification of those goals, and defined time horizons—as the foundation of their portfolio.

With these necessary inputs in mind, investors can now move on, bridging the gap between financial goals and investment outcomes by building portfolios that take advantage of the market landscape and are resilient to different market scenarios.

A Three-Step Process to Identify Financial Goals

Step 1: Write down your top three financial goals in order of importance.

Step 2: Look at the list of common financial goals below. Write down any goals here that are important to you (five at most).

• To be better off than my peers
• To pay for personal self-improvement (for example, go back to school, learn a skill)
• To experience the excitement of investing
• To start a new business
• To buy a house
• To help pay for my kids’ college education
• To stop working and do something I love
• To go on a dream vacation
• To relocate in retirement
• To care for my aging parents
• To give to charity or other causes I care about
• To feel secure about my finances in retirement
• To feel secure about my finances now
• To leave an inheritance to my loved ones
• To retire early
• To pay for future medical expenses
• To not be a financial burden to my family as I grow older
• To manage my debt

Step 3: Look at your initial list and master list. Consider the goals you wrote down in step one and step two. Of these goals, what are the top three? Write them down in order of importance.

Keep an Eye Out for Market Opportunities in 2025

Investors benefit from the ability to adapt their portfolios to the market landscape because the risk/reward trade-offs best suited to meet investment goals vary across assets and through time. Moreover, there are many instances where the market or benchmark portfolio is not ideal for an investor with ambitious financial goals. Market-cap indexes, for example, tend to be more concentrated in the most overvalued positions, which can be a detriment to appropriate risk management.

Higher Interest Rates Benefit Investors With Lower Return Requirements

As we enter 2025, what the market is offering a goals-based investor is quite different than what it was offering just a few years ago, and we believe the current environment is a good one for a multi-asset investor. There are reasonable levels of return achievable without taking on excess risk. An investor looking to meet an investment goal of 1% to 2% above inflation would not need to take on higher levels of investment risk by being fully invested in a 100% equity or equity-centric strategy. An income-focused multi-asset solution is more likely to both protect and grow that investor’s capital.

Since the beginning of 2021, the 10-year US Treasury yield has increased by more than 3%, and inflation has abated from its recent heights, with the year-over-year US Consumer Price Index being 2.9% as of Dec. 31, 2024. Therefore, high-quality bonds offer a positive return over inflation, allowing clients to increase their purchasing power without taking on equity or credit risk.

There Are Plenty of Opportunities for Investors Requiring a Higher Return

But if your goals are more ambitious than simply outpacing inflation, we think there are also opportunities within risk assets that are priced to offer a reasonable risk/reward trade-off. Investors wanting to meet a more aggressive investment goal of 3% to 4% above inflation would be better suited to a more equity-centric portfolio to meet their higher-growth objectives. A multi-asset solution that combines the more predictable yield from fixed-income assets with the higher potential growth and capital upside from a diversified equity core provides the potential for superior risk-adjusted outcomes.

While equities in aggregate appear fully valued, there is a reasonable level of dispersion across sectors and regions to provide opportunities for the patient investor. US technology names have been standout contributors to global equity returns over the past two years, with the valuations of those leveraged to the artificial intelligence theme appearing relatively full. But there are attractively valued opportunities elsewhere, such as smaller US companies and those in traditional industries that have fallen out of favor. With the global economic outlook remaining uncertain, there are also valuation opportunities in more defensive areas of the equity market. Consumer staples and healthcare are two sectors that offer reasonable risk/reward trade-offs, particularly for those trading on European markets.

Successful Portfolios Are Resilient

Unfortunately, investment returns don’t usually come in a straight line. When constructing a portfolio, one must consider the range of potential scenarios moving forward and create a strategy that holds up across these outcomes.

For example, we believe looking to assets outside of fixed income as diversifiers may be wise, given the uncertainty regarding inflation and interest rates, which has been amplified following the 2024 US election results. In this scenario, we look to historical periods for guidance, such as those before the 2000s when we experienced ultralow inflation and interest rates. In this environment, bonds did not always act as the equity hedge that many investors hoped for. Instead, many liquid alternative strategies were better equity diversifiers than fixed income.

How to Build a Robust Portfolio Aimed at Long-Term Financial Goals

Our perspective on building robust portfolios aimed at reaching investors’ financial goals involves taking the time to uncover and quantify an investor’s financial goals and then developing an investment strategy with allocations to defensive positions that provide downside protection in market drawdowns as well as more opportunistic allocations that provide considered upside participation during market rallies and recoveries.

While it’s tempting to talk about the impact of economic and political events, the short-term sentiment stemming from those events tends to be just that—short term. Thus, we believe that keeping an investor’s financial goals at the forefront of portfolio decisions, following a repeatable valuation-driven approach, and unplugging from short-term noise give investors the best opportunity to meet their investment goals in 2025.

This article includes contributions from:

• Rick Williamson, Head of Investments, Multi-Asset Strategies
• Sean Neethling, Head of Investments, South Africa