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Wealth Assessment Survey: Investment Strategy

November 22, 2010
by Jack Reynolds

Your votes are in. Overwhelmingly, you said the factor having the greatest influence on managing your wealth today is your investment strategy including: diversification of concentrated holdings, evaluating liquidity requirements, evolving a suitable asset allocation and using alternative assets such as hedge funds, buy-outs, venture capital, real estate and natural resources.

Investment strategy is a high priority and has become increasingly complex in our challenging economic times. However, before getting to the specifics mentioned above, you and your team of advisers need to do some important background work. An investor is unlikely to navigate successfully to their destination without successfully articulating, for all their advisers and fellow assets owners, what their intended destination is. Are you running a foundation that is to operate in perpetuity or one that sunsets in a known period? Is yours a goal of growing wealth for generations to come, or is it to live well, make charitable gifts during your life, and pass on something to your children.

It is essential to be clear about you Financial Goals with all involved in your investment process.Your Financial Goals are most effective if they detail your spending policy, risk tolerance and liquidity needs. Thus armed, you can set a quantified Investment Objective. That is to say, what investment return is called for to meet your Financial Goals? Your Investment Objective is also needs to be consistent with your spending/gifting plans, risk tolerance and liquidity needs.

The investor’s asset allocation, diversification trajectory and liquidity structure will be the outcome of their Financial Goals and Investment Objective. Establishing that strategy is an exercise that is both quantitative and qualitative. There are models that can help, but ultimately the design of your Investment Strategy is idiosyncratic and individualistic. It is not to be carved in granite, but it is rather organic. It must respond to the investor’s changing needs and it must comprehend the external environment. It is to be subjected to regular review and pressure-testing.

Your investment philosophies will influence the implementation of your strategy. E.g., do you have a predilection for passive index investments vs. active asset management? What is your tolerance for complexity in selecting your manager structure? What is your comfort with illiquidity (alternative assets limit your liquidity)? Do you embrace Socially Responsible Investing?

If you wish to address these matters with me, please click here or give me a ring.