By Adam Laird on November 14, 2023
For families who have built their wealth over a lifetime or have experienced a liquidity event such as the sale of a business after decades of hard work, the prospect of being held hostage to the whims of the market can be frightening.
The reality is that markets are inherently volatile, and you need to be able to tolerate short-term volatility in your portfolio. If not, you may react to fluctuations in ways that are detrimental to your long-term returns like, for example, forcing liquidation at inopportune times.
But how much volatility are you willing to tolerate?
To mitigate volatility over the long term, you need a portfolio built and managed based on your goals and risk tolerances, not market performance. Having a portfolio grounded by your tolerance to risk and driven by goals-based benchmarks will help provide long-term wealth sustainability and keep you feeling at ease, even in turbulent times.
Assessing Tolerance for Risk
Gauging Your Own Risk Tolerance
When thinking about how the returns from your investments will support your family’s down-the-road needs, you also need to consider the other side of the coin—your risk tolerance.
Your tolerance to risk is highly personal, which is why there should always be harmony between how you feel comfortable investing and how you actually invest. If you’re a low-risk investor with high-risk investments, you might find yourself ringing alarm bells with every market shift.
Your risk tolerance should always be assessed and balanced with both market conditions and the pursuit of your specific short, medium, and long-term goals.
Measuring Success
Understanding the Importance of Relative vs. Goals-Based Benchmarking
At its core, benchmarking revolves around one question: has your portfolio been successful?
A common approach in our industry is to track success by measuring your portfolio’s behaviour against relative benchmarks like market performance. Since these metrics might not be relevant to your family’s overall needs, this practice often leads to problems like depleted capital, missed funding requirements, and exposure to unnecessary amounts of risk—all of which jeopardise the long-term sustainability of your family’s wealth.
Instead, your portfolio should be structured to determine performance based on your actual needs and goals. Tracking goals-based benchmarks that take into account your individual lifestyle and financial goals and risk tolerances will help you remain committed to your investment strategy even through market ups and downs.
Viewing Prudent Rebalancing as a Risk Management Tool
Rebalancing can be an important risk management tool, but it needs to be done using disciplined processes to be effective. If it’s performed too frequently, you run the risk of driving up costs and not capturing the momentum of well-performing assets. If it’s not done often enough, that could expose you and your portfolio to unsuitable levels of risk.
Also, any rebalancing within the portfolio should be discussed and reflected in the Investment Policy Statement.
Although market volatility isn’t something you can change, it is something you can prepare for with portfolios that are built to reflect your lifestyle ambitions, financial needs, and risk tolerances—helping you achieve your own goals and not arbitrary benchmarks.
HighView is an experienced fiduciary portfolio management firm committed to investor transparency. We would be happy to discuss our goals-based investment approach with you and your professional advisors.
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