Over the last two decades, our team has seen many “portfolios.” We put that in quotes because too often the portfolios that come to us seem to be merely a collection of investments or views. Often it seems to us that there has been no construction, just acquisition or divestiture.
Even worse, these buy or sell decisions are not made in a way that maximizes the likelihood of a person reaching his or her objectives. So, what does it take exactly to build a portfolio?1
Understanding how much capital will be necessary, for liquidity, for lifestyle and for legacy, is, in our opinion, one of the most important steps in the portfolio construction process. You need to ask yourself, What do I need now and over the intermediate and long term?
That is your starting point. Once it’s defined, things can quickly be put into perspective and a portfolio constructed. We at UBS call this a goals-based approach. Think of the members of a family putting their goals on paper. Then, as they allocate capital to support those goals, they know that there is liquidity to fund those goals in the short term, cash flow to support their lifestyle in the longer term and a dedicated strategy to help create a legacy for future generations and institutions.
Understanding how much capital will be necessary, for liquidity, for lifestyle and for legacy, is, in our opinion, one of the most important steps in the portfolio construction process.
We believe that this kind of knowledge can have two very distinct results. First, a portfolio can be specifically created for these goals, each with its own asset allocation, security selection and risk budget. This fundamental approach to investing for goals is the bedrock of sound portfolio construction, in our view.
Second, the knowledge that all of a family’s goals can potentially be met by portfolio allocations specifically designed for that purpose, creates a behavioral response that improves the chances of a successful outcome.
One of the key causes of poor performance is behavior. Fear and greed can cloud client judgment at pivotal moments, and frequently prompt unfortunate decisions at precisely the worst time.2
If “buying low and selling high” were easy, everyone would be doing it. But, instead, by employing proper portfolio construction based on your particular family’s goals, you can have a sense of comfort, and can take advantage of, the opportunities that the inevitable incidence of volatility creates.
In sum, define your goals well. Albert Einstein reportedly said, “If I have an hour to solve a problem, I will spend the first 55 minutes defining the problem.” So, spend your time making your plan and ensure that the execution of that plan is specific, durable and empowering.
1 Mike Ryan and Michael Crook, “Your Wealth & Life— Total Wealth View,” CIO Wealth Management Research, UBS Financial Services Inc., May 24, 2016.
2Svetlana Gherz and Ronald Sutedja, Intellectual Capital Blog—Quantifying the cost of investor behavior. CIOWM Research, UBS Wealth Management, May 2, 2016.
Thomas Mantione and Andrew B. Shantz are Financial Advisors with UBS Financial Services Inc. in Stamford, CT. UBS Financial Services Inc. Financial Advisor(s) engage Worth to feature this article. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the U.S. CIMA® is a registered certification mark of the Investment Management Consultants Association, Inc. in the United States of America and worldwide. As a firm providing wealth management services to clients, we offer both investment advisory and brokerage services. These services are separate and distinct, differ in material ways and are governed by different laws and separate contracts. For more information on the distinctions between our brokerage and investment advisory services, please speak with your Financial Advisor or visit our website at ubs.com/workingwithus. The strategies and/or investments referenced may not be suitable for all investors. UBS Financial Services Inc., its affiliates and its employees are not in the business of providing tax or legal advice. Clients should seek advice based on their particular circumstances from an independent tax advisor. Insurance products are made available by UBS Financial Services Insurance Agency Inc. or other insurance licensed subsidiaries of UBS Financial Services Inc. through third-party, unaffiliated insurance companies. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc., a subsidiary of UBS AG. Member, FINRA/SIPC.
This article was originally published in the August/September 2016 issue of Worth