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With your goals and risk tolerance as guides, you can identify the right combination of asset classes to create a portfolio that fits your objectives.

When going on vacation, you probably wouldn't just hop in your car and start driving, hoping that you'd end up somewhere nice. You certainly wouldn't just follow the other cars on the road, assuming that they were going somewhere you wanted to go.


First, you'd think hard about the kind of vacation you wanted to take and choose a destination that best fits your needs and desires. Then, you'd map out the best way to get there, taking into account how much time you have and any potential obstacles that might get in your way – traffic, road work or weather. You would do this because you know that thorough planning is essential to ensuring that you get to your destination, and because it gives you the confidence that you're on the right path.


Investing works in much the same way. Making investments without a clear sense of your ultimate goal is like driving without a destination. You're liable to make snap decisions about your next move, encounter challenges you aren't prepared for and find yourself going around in circles while everyone else passes you by.


Having a plan provides peace of mind


What you need is a plan that's tailored to your needs, aimed toward your goals and mindful of potential risks. A plan that is driven by your objectives, allowing you to stay focused on your destination and that keeps you from overreacting to the short-term, day-to-day fluctuations in the market.


Objective-driven investing is a framework for thinking about your portfolio. We believe that a long-term approach to managing your wealth provides the structure to help you best achieve your goals and avoid making emotional decisions that can undermine performance. When you know that your portfolio is constructed in a way that is customized to meet your lifestyle needs, wealth-transfer goals and tolerance for risk, you'll be less inclined to deviate from your plan during volatile periods in the market. You can't control how the market behaves, but you can control how you react to its behavior.


Know what you want


Before you invest your assets, you need to know why you're investing them. Perhaps you're interested in achieving a particular type of lifestyle, or looking to leave a legacy for subsequent generations. Maybe it's a combination of the two. Whatever your goals, it's crucial that you identify and articulate them – this is the foundation for your plan. Here are some common objectives that we see when talking to investors:


Lifestyle Needs


  • Maintaining a certain standard of living in retirement    
  • Generating income to cover current expenses    
  • Preserving wealth by keeping pace with inflation    
  • Creating wealth to pay for travel, a vacation home or a grandchild's education    
  • Funding charities and causes that are important to you


Wealth-Transfer Goals


  • Transferring assets in a tax-efficient manner    
  • Designing charitable bequests to be passed on after death    
  • Pursuing growth in order to leave a legacy to your family


The relative importance of these needs and goals informs how you invest your assets. For example, an investor who is more interested in satisfying their current lifestyle needs may benefit from more conservative, income-generating investments, whereas those looking to build wealth and leave a legacy may want to take on more risk in pursuit of higher overall returns. Those who put a particular emphasis on their wealth-transfer goals may not just be planning for the next generation, but potentially for several generations beyond that. This means that the time horizon for investing assets could be well beyond their lifetime, which would have a significant influence on how assets are allocated and monitored.


Understanding Risk


Typically, we speak of risk in terms of the potential loss of assets. However, it's also important to consider the risk that an improperly allocated portfolio might not achieve its intended goal. While investing primarily in fixed income can protect against short- and near-term losses, as well as inflation, such a strategy won't generate the returns necessary to satisfy long-term growth of principal or wealth-transfer goals. In order to do that, an investor must be willing to venture into asset classes that meet those specific needs, and might be exposed to more risk.

Illustration 1: Understanding Risk

When constructing a portfolio, we consider the role that different types of investments can play in helping you reach your goals. If you've decided that you're looking to fulfill your lifestyle needs, you may need to rely on these types of investments:


  • Investments in cash, fixed income and other structured products can provide stability, liquidity and even income    
  • Treasury Inflation Protected Securities (TIPS), commodities and real estate investments can provide a hedge against inflation    
  • Investments in domestic and international equities or absolute return strategies offer growth and assume more risk


For those aiming for wealth-transfer goals, these types of investments may be more advantageous:


  • Investments in international fixed income, hedge funds and real estate investment trusts (REITs) provide opportunities for diversification while seeking growth    
  • More focused investments in value or growth equity, private equity and private debt target high returns, but also carry substantial risk


However, whatever your objective, it's important to manage risk by spreading investments across a variety of asset classes. Depending on your objective, your portfolio can be diversified in a way that favors asset classes that are complimentary to your goals, while maintaining smaller allocations in other asset classes intended to offset risk.


In order to achieve the necessary returns to fund long-term wealth-transfer goals, an investor would most likely have to rely on riskier strategies, which may include investments in domestic and international equity, as well as private equity. However, a portion of the portfolio could also be invested in international fixed income or hedge funds. These types of investments generally have a low correlation to equity asset classes, meaning their performance typically does not move in the same direction, which serves to lower the portfolio's overall volatility. Smaller allocations to cash or fixed income investments can help, as well.


Start by devising a plan


By clearly articulating your goals and fully appreciating the risks that come with trying to reach them, you can arrive at an investment plan that gives you the confidence to stay on course and avoid overreacting to market volatility. Consider working with a wealth manager who has the tools and experience necessary to help you craft an investment plan that is specifically designed to get you where you want to go. A good wealth manager will work with you to evaluate your current investment plan (including cash flows, liabilities and the tax impact of each decision) and provide you with projections based on your personal investment situation.

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