Reaching Your Investment Goals

By HighView Financial on September 9, 2021

This article is focused on the need for Investment Advisors to customize the “investment ride” — the portfolio value ups-and-downs — that investor clients take with them. Specifically, so much of the global wealth management industry, despite the worst global financial meltdown in seven decades, continues to be focused on “Total Return” without consideration of either (1) Risk and/or (2) A client’s investment goal(s). The purpose of this article is to highlight the reality that Charles Ellis, in his book, Investment Policy: How To Win The Loser’s Game, quoted:

“Performance measurement services do not report results. They report statistics………There are not real results until the process stops and the portfolio is finally liquidated.”

In other words, the various performance statistics that are measured and presented on clients’ portfolios do not matter unless/until they’re measured against meeting the client’s ultimate goal(s). That goal could be a regular income stream that is liquidated from the portfolio or reaching a savings goal for the purchase of cottage.

For this reason, at HighView Financial Group, we believe that performance measurement is an important component of the overall portfolio monitoring process but unless this measurement is done within (1) the context of a client’s Investment Policy — which should always include their tolerance for volatility….”The Ride” — as well as (2) the client’s ultimate goal(s), the portfolio measurement will be merely a set of statistics that are done in a “client vacuum“.

#1. Performance Statistics & The Ride:

Despite the simplicity of this statement, so many clients and Advisors continue to be obsessed with the “total performance” results. As raw performance is merely a “snapshot in time”, let’s look at two examples of different portfolio investment results, each with a slightly different end result performance numbers:

Portfolio	Annual Rate of Return			Annual Compound Rate of Return (Yr #1 – Yr #3)
	Year #1	Year #2	Year #3
#1	10%	-20%	30%	4.5%
#2	3%	4%	3%	3.3%

Clearly, both Portfolios deliver slightly different results after three years (4.5% vs 3.3% per year) BUT Portfolio #1 has delivered a far more volatile ride than Portfolio #2. As percentage numbers never convey the full emotional impact as invested dollars, consider the client who owns Portfolio #2, and originally invested $500,000; at the end of Year #2, they’d open their statement and see that their $500,000 was now worth $440,000 — in other words, they had lost, at least on paper, $60,0000. This contrasts with Portfolio #2, when at the end of Year #2 the client opens their statement and discovers that their portfolio was now worth $535,600. At the end of Year #3, both Portfolios have different dollar values ($572,000 vs $551,668) but clearly, the owner of Portfolio #1 has experienced a lot more “sleepless nights” over that three-year period to earn their higher return than the owner of Portfolio #2.

Our experience in managing private wealth for more than three decades, is that Client #2 will be a far happier client than Client #1, as most clients — once they’ve been educated on the risk-return basics of capital markets realities — will trade-off volatility for consistency, and are prepared to pay for this “return consistency” through lower returns, especially if their investment goals are being satisfied….which brings us to our last point………

#2. Investment Goals:

Although these are only examples, they highlight the flaw in looking at performance only at “snapshots in time” without considering/discussing the “volatility” of the performance as well as each client’s investment goals. It has been our experience that clients always have a purpose(s) for their money…..funding a retirement lifestyle, the purchase of a vacation property, legacy needs for children & grandchildren….all of which can have different time horizons. We believe that it’s the job of a true Financial Advisor to help clients clearly articulate their goals and how their money should be managed to help them reach those goals by having an investment plan and portfolio structure(s) that provides them with an “investment ride” that enables them to “stay the course” . In other words, the perpetual pursuit of the highest total returns, without regard to client tolerance for risk/volatility and client goals can create extreme levels of embedded risk in client portfolios, and if gone unchecked, more times than not, can result in the destruction of wealth. The near global financial collapse of 2008 is a prime example of this. These types of capital market debacles of the past have only served to illustrate and reinforce the gap that exists between the results of a “total return only approach” to managing investment portfolios, that have been largely delivered by the investment industry, to their clients, versus what would have been required to meet the desires, expectations and goals of the investors, as they move along their journey in life over time, regardless of their level of investable wealth.

Many advisory firms have attempted to close the gap, through the deployment of Financial Planning Tools to assist their advisors in gaining an understanding of the clients’ goals, over time. While this approach has helped to improve the dialogue, with the clients, and to gain a better understanding of their long-term goals it has not, for the most part, translated into investment strategies and portfolios that are aligned to meet the investors’ goals discovered when preparing the financial plan.

The language of goals-based planning is on most industry practitioners’ lips these days as our industry strives to reset itself and deliver client centric investment solutions rather than simply investment products or portfolios with a single time-horizon. The challenge we all face is how to truly make a goals-based investment portfolio live in a manner that marries the investment strategies we employ with our clients’ goals, over time.

The best solution that we have seen, thus-far, to move Goals-Based Investment Planning from an illusion to reality is to employ a Balance Sheet Methodology approach, which effectively builds, as an integrated process, the bridge between goals based financial planning and the ultimate investment portfolio.

For more information on the concept of the “Balance Sheet Methodology” please click here

What Are The Practical Implications Of This?

The global investment industry needs to stop this obsession with “total return” — and the inherent risks that are associated with such an approach — and start to adopt a “purpose driven” approach to designing portfolios for their clients that focuses on the pursuit of their goal(s) within the context of creating a customized investment ride for clients that they can “stay the course” through the ups-and-downs of the global capital markets.