Alignment of Portfolio with Goals

By Greg Rodger on April 19, 2021

An architect wouldn’t design a custom home for a family without first asking many questions about what the homeowners are hoping to achieve (e.g. size, budget, form, and function).  And the process of designing an investment portfolio should be no different.  However all too often investment portfolios are not aligned with the actual needs of the investor and what would be comfortable for the investor over time – which typically leads to disappointment.

When aligning a portfolio with investor goals there are three critical factors to consider:

  1. The purpose of the funds
    1. To fund current and/or future lifestyle needs?
    2. Charitable giving/philanthropy?
    3. Leave an estate?
    4. Purchase a vacation property?
    5. Financial assistance for children/grandchildren?
    6. Fund a business venture?
    7. Other?
    8. All of the above?
  2. The time horizon(s) of the specific goal(s), and
  3. The acceptable level of risk (defined by volatility and potential for not achieving goals)

Once the goals and time horizon associated with each have been established, then a rate of return can be calculated for the portfolio to fund those goals.  This required rate of return now provides the initial framework to be used for designing the portfolio.  For example, let’s assume an investor requires an annualized return of 5% per annum to fund all goals over their lifetime.  Using reasonable forward-looking return estimates for each asset class you can define the optimal allocation to bonds, stocks and alternative investment strategies to provide a high probability of achieving the 5% annual rate of return, on average over time.

The final step is to determine if the portfolio that has been designed is likely to behave in a manner through time that the investor will comfortable with.  If the portfolio is expected to be more volatile than the investor is likely able to accept, then you run the risk of a panic liquidation at an inopportune time.  If the portfolio that is required to meet the goals is determined to be ‘too risky’ then the investor has two choices – accept a lower rate of return (and modify some goals), or understand that there are likely to be some periods of time where they will feel uncomfortable with how the portfolio is behaving but resist the urge to sell (easier said than done). This last step may comfort investors further when their portfolio is managed with real Fiduciary practices, such as our standard client protocol at HighView.

Fiduciary: A duty of a person to act in another person’s best interests. In the case of an advisor, this means they have a legal and ethical duty to act in the best interests of their client.

Creating a goals based portfolio improves the odds of an investor being able to achieve all of their financial objectives over time.  Of course as financial goals evolve and change over time, this goals based planning needs to be updated regularly; and adjustments made to the portfolio design should the required rate of return change.

Greg Rodger
See Beyond

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