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Family Inc. by Douglas P. McCormick

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CHAPTER 9

Define the Right Goals for Your Asset Management Business

When discussing their investment experiences, many people gravitate to their “home runs” or the “quick flips” in which they doubled their money in a few months. While these stories can be entertaining, they are immaterial in the broader context of your portfolio performance goals. The relevant measure of your asset management business is the long-term return on your portfolio after fees, taxes, and inflation, with return defined as the internal rate of return, or IRR. This metric highlights the components of investment returns that must be actively managed, including:

  • Gross return. The dominant factor driving IRR is gross return—your gains or losses versus the cumulative cash flows you have invested. The factors that influence gross return include (a) asset-class composition—are you invested in fixed income securities or equities?; (b) performance within the asset class—how did your specific investments or your selected manager perform in relation to the rest of the asset class?1; and (c) invested position—how much of your assets have you actively invested? I define investments as assets that carry risk, either in the form of credit or capital risk (the likelihood of loss) or duration risk (the likelihood that conditions will change over time, as with a 30-year Treasury bond or a stock). Being uninvested doesn’t necessarily imply zero return. Bank accounts that are insured up to FDIC limits, T-bills with less ...

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