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Wealth of Wisdom

The Top 50 Questions Wealthy Families Ask

TOM McCULLOUGH | KEITH WHITAKER

Section 3 - Investing Wisely

Introduction

Investments and Risk

It is not surprising that families have questions on investments. They are notoriously difficult to forecast and are often complex, there are many self-proclaimed experts on the topic with contradictory opinions, and they are rife with misinformation and conflicts of interest.

Yet it is extremely important for families to understand their investments, because they are engine that powers the family’s financial ship and funds the family goals. When thinking about investments, the focus is frequently on expected returns. The articles in this section try to shine the light in a different way – paying special attention to the goals, the risks, and the choices implicit in the investment returns.

We start with an essay by Ashvin Chhabra that answers the question “How can you make sure your portfolio lines up with your actual goals?” Many investors set out into capital markets without understanding what they are trying to achieve. Ashvin explains why a clear path makes for happier outcomes.

Chris Brightman proposes a thoughtful response to the question “What return should you expect from your investments?” Although it is fair to say that no one can predict investment results (particularly in the short run), Chris lays out a fact-based and time-tested formula for capital market expectations that investors and their advisors can use.

Jean Brunel address the very practical challenge of “What should your asset allocation be?” He marries the ideas of quantifying family goals and constraints, creating specific portfolios to meet specific goals, and aggregating the portfolios into an overall investment policy. The result is an investment program that improves the probability of meeting investor goals.

We then offer three essays on the topic of financial risk. Howard Marks and Jim Garland respond to the question: “What is the most useful definition of ‘risk’ for private investors?” Each of them brings their own experience and expertise to this important topic. One issue they agree on is that the most common definition of investment risk – volatility – can be deceptive and even dangerous and may lead investors astray, and that there are better ways to quantify and apply risk.

Finally, we tackle how to determine the best approach to selecting suitable investment strategies and vehicles. Charley Ellis answers the question “Is active management still worthwhile?” with a resounding no. He argues that, given the substantial changes in the investment industry, performance-seeking investment managers can, on average, no longer outperform their benchmarks net of the fees they charge and that index investing is the way of the future. Tim Armour answers the “How do you choose investment managers?” question, recognizing that, in the right context, there are still successful active managers to be found, as hard as it may be.

Investing is a challenge for all families. For some, the investments are a counterweight to their operating company assets, and for others they are the main store of wealth. Some choose to make decisions themselves, whereas others opt for advisors and investment managers. And some invest in public, liquid assets, and others seek out unique private investments. Whatever the approach a family takes, solid answers to the key questions – the goals they want to fund, the returns that are realistically achievable, the risks the family can bear, and the strategies they choose to employ – will substantially improve the likelihood of success and the comfort of the journey.

Preview Section 4

Chapter 13 – How Can You Make Sure Your Portfolio Lines Up with Your Actual Goals?
Ashvin Chhabra

Chapter 14 – What Return Should You Expect from Your Investments?
Christopher Brightman

Chapter 15 – What Should Your Asset Allocation Be?
Jean Brunel

Chapter 16 – Does Investing Have to Be Complicated?
Robert Maynard

Chapter 17 – How Should You Understand and Deal with Investment Risk?
Howard Marks

Chapter 18 – What Is the Most Useful Definition of Risk for Family Investors?
James Garland

Chapter 19 – Is Active Management Still Worthwhile? – I
Charles Ellis

Chapter 20 – Is Active Management Still Worthwhile? – II
Randolph Cohen

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