Independent Thinking^®

Planning & Investing with Confidence

The volatility of the past seven months, after a seven-year bull market, the longest on record, has shaken investor confidence and reminded us all that traditional investment plans can jeopardize financial security and thwart aspirations.
 

Inaction carries its own risks, however. Portfolios left untended will be more subject to inflation and event risk.
 
The starting point to confident investing is to assess an individual’s specific goals and true tolerance for risk, and to create in that context a strategic wealth plan that evaluates his or her entire financial circumstances, across existing holdings and related tax and family entities. The next steps – and our focus here – are to design an investment portfolio and to structure and manage its assets accordingly.
 
The real needs of private investors can be counterintuitive. Individuals planning for retirement are often focused exclusively on principal protection and income preservation. For some, that’s the right approach, and we construct current-income preservation portfolios for their total wealth that are designed, and regularly recalibrated, to adjust for inflation and for the timing and amount of investment and spending. (Spending in down markets requires additional investment and/or higher returns to restore principal value.)
 
For others, the perceived risks can be disproportionate to their actual circumstances, and they are potentially shortchanging themselves and their heirs. For these individuals, distinct and prioritized asset pools with a clear purpose enable them to allocate capital across multiple objectives – a new business, for example, or a philanthropic legacy. In other words, we seek to effectively ring-fence lifestyle needs as much as possible before investing for growth. A balanced growth pool can be designed to maintain purchasing power and liquidity, for example, while a long-term appreciation pool can potentially enhance returns by assuming additional risks, such as concentrated assets or illiquidity.
 
Seven years of strong returns made many investors complacent, and the recent volatility came as a shock. We need to be mindful of their long-term goals and consider their real appetite for risk in that context – and across their holdings. At Evercore Wealth Management, all conversations begin at the strategic level and then drill down to the proper allocation for each objective to ensure that the client is fully engaged before discussing specific investments for each asset pool. We fund each asset pool according to its specific purpose and across five distinct asset classes: cash; defensive assets; credit strategies; diversified market strategies; growth assets and illiquid alternatives.
 
One client, a financially conservative investment banker in his late 40s, described this portfolio construction process as liberating, allowing him to implement a plan constructively instead of putting off the decision. Prior to the reconstruction of his portfolio, this relatively young banker was largely invested in highly rated cash securities and fixed income; these are now confined to his current-income preservation pool and the remainder is invested in high growth equities, opportunistic credit and private equity.
 
As a significant proportion of his pay is awarded in shares in his firm, most of which have yet to vest, only a modest proportion of his total assets are invested in additional illiquid investments. As these shares vest and are diversified, the proceeds will be reinvested and used to rebalance the portfolio over time as his objectives evolve. He is, however, also invested in our diversified market strategies portfolio, an allocation that offers returns uncorrelated from his growth and defensive asset portfolios.
 
The allocation was decided when, in one of our quarterly meetings, we displayed our purpose-based asset grouping across both the investments that he entrusted to Evercore Wealth Management and those outside the firm, including the concentrated stock in his company and an investment real estate holding. (We review each client’s entire investment capital base to ensure that our advice is integrated.) It was clear to him that he needed a greater allocation to diversified market strategies, especially given his negative views on the event risks and the lack of this exposure elsewhere in his portfolio, particularly the equity in his company. This is not only concentrated and correlated to equity markets but also subject to vesting requirements and other restrictions.
 
We will be revisiting his allocations over the coming months, adjusting as his circumstances and our collective market views evolve, but staying focused on meeting his goals. It is important to note that each goals-based asset pool will have a different total return profile, income and liquidity characteristics and maximum drawdown outcomes. As clients develop different family entities, such as long-term trusts for heirs or a family foundation, the allocations among the broader pools may change to accommodate each of these entities’ specific objectives.
 
This approach to asset allocation by purpose and priority enables the advisor to remain focused on expectations of meeting or exceeding the client’s specific goals, mindful of their prioritization and related time horizons, as opposed to the short-term performance of specific investment products. It also enhances communication, keeping the client and his or her advisors on the same page and understanding why specific investments have been selected. More important still, an investment portfolio that is structured and managed in line with the individual investor’s specific goals and tolerance for risks provides the private investor with the potential to protect and grow assets in all market conditions.
 
For more information on the Evercore Wealth Management diversified market strategies allocation, see Brian Pollak’s article on page 6.
 
Chris Zander is the Chief Wealth & Fiduciary Advisor at Evercore. He is also the President and Chief Executive Officer of Evercore Trust Company of Delaware. He can be contacted at [email protected].