Building Portfolios to Meet Objectives, not to Beat The Market

I would like to introduce a subtle difference in the manner in which investment advisors build portfolios for clients.

Most advisors get to know a client through a series of conversations. They ask the client about their financial circumstances, their investment objectives and their investment experience. They may also use a diagnostic tool to objectively measure the client’s tolerance for risk. Given this information, the advisor will then build a portfolio that will seek to maximize the return given the maximum level of risk the client can tolerate.

There’s a problem with this approach. The client has now taken on the maximum level of risk that the advisor believes she can tolerate. In a stock market environment like the one we find ourselves in currently, the client could suffer significant losses.

Is this the best way for the client? Probably not. What if, instead, the advisor worked with the client to quantify the financial goals the client wanted to accomplish and then built the portfolio specifically to meet those goals? Rather than attempt to deliver the highest returns possible, the advisor would seek to meet the goals and minimize the amount of risk the client incurred along the way. This would likely allow the client to have a much less rocky ride in the markets.

We believe this is the way your portfolio should be constructed. It’s not about maximizing returns. It’s about achieving your goals and minimizing risk.