square round hole

Content provided by Scott Kubie, CFA, CLS Chief Strategist

In Omaha, some of the people whose names appear on buildings or near the top of philanthropic donor lists have two sources of wealth: their businesses and their early investments in Berkshire Hathaway. The story goes that in 1960 Warren Buffett invited 10 doctors to dinner and asked each for a $10,000 founding investment in his company. The lucky group that agreed made millions, and those Berkshire investments formed a key part of what are known as aspirational portfolios.

The aspirational portfolio is the portion of investments designed to materially increase the wealth of the investor. It is different from the core portfolio, whose primary purpose is to allow the investor to continue his or her lifestyle in retirement.

Managing aspirational portfolios presents big challenges to the planning and investment management process. Some challenges come from investors throwing discipline to the wind when they see portfolios packed with small individual stocks, hot tips, and the next big thing. Murky objectives also create a problem. How much money would make a difference in an investor’s life? Is there really enough money invested to reach the aspirations attached to it?

Aspirational portfolios challenge investors because they are riskier than growth portfolios but have shorter time horizons. Financial planning approaches assume that risk and time horizons are tightly linked. However, the aspirational portfolio aims to make enough money early enough in the investor’s life to transform his or her lifestyle. While core assets can work over a full lifetime, the aspirational portfolio needs to deliver, in most cases, while the investor has time to spend it.

The results can often trounce the core portfolio in some years, while creating friction between spouses about losses racked up in off years – or too aggressive years.

Financial professionals often have very aggressive aspirational portfolios in their own accounts. During the tech bubble, I took calls from a few, very emotional financial planners who decried the sharp downturn in technology stocks. Sometimes I innocently asked how their portfolios were invested, and then the real emotion would flow. The promise of high returns combined with their closeness to the markets led them to jump in with both feet rather than following the prudent advice they gave to their customers.

So, how should the aspirational portfolio be managed? It’s a question I would welcome feedback on from our readers. Some initial ideas are below:

  • Include legacy goals in the aspirational portfolio. They lengthen the portfolio’s horizon and allow for inclusion of enough assets to make the portfolio worth managing.
  • For investors with a “fun money” account, set a maximum dollar value and/or an end date. If the portfolio strikes it rich, the money doesn’t get lost doubling down on the next idea.
  • Increase the risk budget of the core. Thoughtful investors may benefit from a small increase in the core portfolio’s risk budget to reflect the blending of aspirational goals with core objectives.
  • Create two risk budgets for clients. One budget covers the core portfolio and the other the aspirational portfolio.
  • Consider using a CLS Protection Strategy. If the market runs strong, protection strategies are likely to profit, while large declines can be lessened by the protection allocation.
  • Pick an aggressive strategy to invest in. CLS offers a number of higher-risk targeted strategies (any risk-budgeted strategy with a 90+ risk budget works too).

Aspirational portfolios are tougher to fit into financial plans and can be sources of friction between financial planners and investors. Handled correctly, however, they reflect the goals and dreams of investors and provide better probabilities that some aspirational goals might actually be accomplished.

The views expressed herein are exclusively those of CLS Investments, LLC, and are not meant as investment advice and are subject to change.  No part of this report may be reproduced in any manner without the express written permission of CLS Investments, LLC.  Information contained herein is derived from sources we believe to be reliable, however, we do not represent that this information is complete or accurate and it should not be relied upon as such.  All opinions expressed herein are subject to change without notice.  This information is prepared for general information only.  It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report.  You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized.  You should note that security values may fluctuate and that each security’s price or value may rise or fall.  Accordingly, investors may receive back less than originally invested.  Past performance is not a guide to future performance.  Investing in any security involves certain systematic risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk.  These risks are in addition to any unsystematic risks associated with particular investment styles or strategies. A client’s risk budget is derived from the client’s specific answers to CLS’s Confidential Client Profile questionnaire, which establishes the client’s financial goals, ability to handle risk, and overall investment time horizon. The individual client risk budget is expressed as a percentage of the risk of a well-diversified equity portfolio.
2727-CLS-11/11/2015