CAN the current approach to how one preserves and grows wealth allow investors to realise their goals and ambitions, or should we rethink our approach altogether?
Let’s put this into context. The past months have brought up a challenging series of events: rising rates and inflation, energy worries, climate concerns and geopolitical conflicts. All this has led to a volatile and uneasy market, as investors grapple with increasing uncertainty. Against this backdrop, these factors introduce variables that change the risk-return equation – the same risk-based approach that worked before would no longer enable an investor to take advantage of similar market opportunities today.
With conventional portfolio management focusing on historical analysis, we believe a paradigm shift in how we approach our investment plan is needed: one that is forward-looking at its core, and is tailored to achieving the myriad goals we have.
Aspirational and essential goals
We all have goals, but there is a distinction between the ones that are aspirational and those that are essential.
Aspirational goals encompass dreams and desires that may not be immediately necessary but hold personal significance, such as a dream purchase or a passion project. Essential goals involve meeting vital needs such as education, early retirement or healthcare.
One investor’s essential goal may be another’s aspirational goal. Passing assets on to future generations may be a good-to-have for you, but a requisite goal for another.
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Thus, we need to recognise that wealth must meet differing demands – from daily financial needs, to longer-term projects and even to transgenerational aspirations.
An investment strategy must take into account varying time horizons and risk profiles associated with different goals and life stages.
A personalised and holistic investment strategy – a goal-based investment strategy – would be key to addressing specific aspirations and essential needs.
Understanding goal-based investing
Goal-based investing is one way to address how investor needs have changed, how markets have developed, and how expectations of wealth management providers have evolved.
Relying solely on historical performance and generic risk assessments to maximise returns over a specific time horizon may no longer suffice, and could even lead to a mismatch between goals and investment portfolios.
Instead of building a singular investment profile, different profiles can be built to address different goals. This allows you to translate your life goals to financial objectives, and allocate resources and manage risks accordingly.
An ongoing journey
Goals change over the years, just as life does. New situations may arise that may require investors to channel their wealth differently, especially if they need to think about managing their families’ wealth.
There may be new additions to a family, or business ventures may take a different direction.
Investors should also bear in mind that individual family members may be at different stages of their respective life journeys, and their essential and aspirational goals may diverge from that of the larger family group.
How goals may be met can change with time, too. If an unforeseen event, such as a pandemic, impacts markets and the global economy, portfolios need to adapt accordingly.
By adopting a holistic investment strategy, investors can think about optimising the allocation of their financial resources. They can make informed decisions that consider the trade-offs between goals.
Reviewing goals and objectives periodically is key to enabling adjustments that ensure portfolios remain aligned with evolving goals, life stages and market conditions.
Rethinking investments
The evolving market landscape, along with changing risk-return profiles, calls for a re-evaluation of investment approaches.
By acknowledging the significance of both aspirational and essential goals, investors can, with the help of their wealth managers, create personalised and holistic portfolios that cater to their unique circumstances.
If investors embrace this new approach to investments, wealth managers will be better able to engage with investors. Wealth managers will have a better understanding of investors’ risk levels, and will be able to maximise the probability of investors reaching their desired outcomes.
In such uncertain times, investors would do well to rethink their goals and rethink their investments.
The writer is head of investment solutions, Asia, at Lombard Odier
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