Goal Based Investing

Besides using risk and return trade-off, we can also define investment objective in terms of life-style.

We may use:

Short-fall risk

Absolute performance (maximum and minimum return of a portfolio)

Cash Flow Matching

Asset Allocation Approach: Monte Carlo Simulation for expected return vs short fall risk: When attaining high return is important and additional fund can be raised to cover short fall risk

Fixed Planning Horizon Insured Strategy: zero coupon bond to meet requirement and the rest in equity: When meeting minimum goal is critical

If planning horizon is changing, traditional asset allocation approach is more suitable.