Purpose Before Portfolio
Business Record Staff Feb 14, 2022 | 8:57 pm
2 min read time590 wordsBusiness Insights Blog, Finance
BY KENT KRAMER, CFP®, AIF®, Chief Investment Officer, Foster Group
“I’m looking for maximum return with as little risk as possible.”
That probably sounds familiar because it seems to be on every investor’s wish list. The problem is that risk and return are (still) directly and positively related: To increase a portfolio’s expected return requires, historically speaking, the assumption of greater risk, including the risks of permanent loss and price volatility.
But is maximum return really the best way to state your investment goal?
In professional golf, there are two major kinds of competition. One is PGA Tour tournament golf, where players try to shoot the lowest score over four 18-hole rounds. Of the approximately 280 strokes they will take, keeping virtually every shot in play is imperative. To win you need a combination of consistency, power and finesse. The other popular golf competitions are Professional Long Drivers Association (PLDA) contests where players try to hit a golf ball as far as possible. To win requires only one drive of the five to 10 balls they hit to stay in bounds and be longer than everyone else’s. No one on the PLDA circuit wins PGA tournaments, and no golfer who wins PGA tournaments wins PLDA competitions. They are playing different games.
It is important that investors know what game they are playing before designing a portfolio or choosing an investment. To win the “game” that investors are playing is usually more complex than a single rate of return over one year or even 20 years. Investors have goals, stated or unstated, and the portfolio ultimately needs to contribute to the realization of the investor’s definition of financial success. For most individual investors:
- The portfolio likely needs to grow some assets faster than the rate of inflation in order to meet long-term goals like retirement.
- It also needs to provide some liquidity (readily available cash) for planned spending and emergencies along the way.
- The portfolio needs to have a degree of risk control to prevent temporary market losses from becoming so severe that the investor sells at precisely the wrong time.
- For some investors, the portfolio should not rely on the success of companies and industries that conflict with the investor’s deeply held values.
Those are just four kinds of investment success, among many, that are not measured simply by highest total return. Successful experiences, winning the investment game, usually looks more like winning a four-day golf tournament, with a combination of consistency, power and finesse, as opposed to swinging as hard as you can at every opportunity and hoping one stays in bounds when you need it.
My 25-plus years of working with investors has taught me that clients make the best investment and portfolio decisions after they have established a clear financial plan. Investors construct their portfolios to achieve many purposes, as expressed in their plan – the map that describes what big-picture financial success means to them. A well-constructed financial plan defines the game that the individual or institution is trying to win.
Are you making investment decisions in light of the game you really want to win? Maybe a good goal for 2022 is to have a conversation with a competent financial planner to see if your investment approach is suited to your most important goals.
PLEASE SEE IMPORTANT DISCLOSURE INFORMATION at www.fostergrp.com/disclosures. A copy of our written disclosure Brochure as set forth as Part 2A of Form ADV is available at www.adviserinfo.sec.gov. ©2022 Foster Group, Inc. All Rights Reserved.
| Kent Kramer