Liability-Driven Investment

CHAPTER 3Introductory Steps into the World of Multi-Asset Class Investment

‘Don't put all your eggs in one basket’

– Harry Markowitz and many others

Every investor, be it a young professional starting their savings journey, or the stereotypical rich industrialist (possibly wearing a top hat) allocating billions will have to make similar decisions when they put their money to work.

They will be confronted with a bewildering and near infinite choice of investments. A stream of difficult questions lies ahead of them as they begin putting their capital into the financial markets. Or, more formally, the investor implements the asset allocation process. The numerous decisions that will have to be made include:

Should the investor directly invest in individual securities?

Should he or she buy into actively managed funds for easy diversification and risk management?

Should they purchase a basket of ETFs (Exchange Traded Funds) as this technique becomes increasingly popular?

What asset classes are appropriate?

Is it best to go passive or active (to be discussed)?

Is he or she more interested in capital growth or security?

Importantly, how does the investor feel about the risk?

What is their risk capacity and how does it compare to their risk tolerance?

For any investor an important question is: Is the return of capital, more important than the return on capital?

Clearly there are a multitude of options available to the average investor. Even more importantly we ask: How can the modern ...