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Seed Weekly - Goal Based Investing

A well-designed and thought-out investment strategy is crucial to anyone planning to build wealth.

Designing such a strategy is no small task. Each individual has unique circumstances, preferences and needs. The future remains opaque and forces one to make certain assumptions that may or may not turn out to be correct.

Another stumbling block in the process of designing an investment strategy, is defining risk for an individual or entity. This is, in fact, harder than one may think. Is it loss of capital (permanent or temporary), minimizing volatility, avoiding large drawdowns, missing growth targets, inadequate liquidity? Is it perhaps all of the above? Or a combination of the above? This question becomes even more convoluted if you realize that one's ability and willingness to tolerate risk is often not the same, or even constant, over time.

This makes one wonder if there is any use in undertaking this laborious exercise.

Many say that this is preferable to nothing, which makes sense. Better a rough model that points vaguely in a direction, than stumbling blindly through your investment life-cycle. Of course, we demand more from ourselves as professionals. We don't like uncertainty and believe that vagueness is not an acceptable basis from which to give advice. It is a major task to get this right.

How does one run a marathon? Step by step.

Start by defining your investment goals, and then ranking them. Apply an 'if-then' heuristic starting with the most important goals. If the primary goals are attainable, to a high degree of probability, determine whether the next goal is realistic and move down the ranking table.

If your primary goal is to have sufficient assets for retirement, and you have a number of years to go before drawing on your assets, adopt a long term approach and ensure that you are adequately funding this goal. Don't let a supplementary goal, such as buying a shiny new car, impede you from reaching your primary goal by applying 'short term thinking' to a long term goal.

Long term goals will have a different definition of risk in comparison to short term goals; not meeting growth targets in the long term should be the primary risk factor. Risks such as minimising volatility, liquidity management and drawdown avoidance should not dominate the primary risk factor. You cannot aim for double digit growth without experiencing some volatility. The shorter term the goal, the more emphasis will be placed on the minimisation of volatility, drawdowns and liquidity management.
The above leads one to adopt a goals based investing approach. This approach will have an investment strategy and tranches of committed capital for each goal. We do not make use of this methodology primarily, as it goes somewhat against most efficiency models and theories. Building an efficient portfolio has been deeply ingrained in our approach, and still forms a major part of our process.

Goals based investing helps one to compartmentalise and understand your goals. It is by no means a perfect solution, as it will result in an overall portfolio that is not optimal. It is something we consider a practical measure in simplifying the task of designing your investment strategy, and as such constitutes a part of the process we undertake to properly design your strategy.

Kind regards,

Stefan Keeve

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Wed, 22 Feb 2017- 12:42



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