The Stewardship of Wealth: Successful Private Wealth Management for Investors and Their Advisors, + Website

Best Practices in Designing Investment Portfolios for Families

Now that we've reviewed the asset allocation process in a general way, along with some of the issues associated with it, let's take a look at how the best advisors and families approach the challenge of designing thoughtful asset allocation strategies.

What Are the Objectives for the Portfolio?

While most institutional portfolios have similar objectives,¹⁵ the objectives for family portfolios can be radically different. It is therefore crucially important that families and their advisors discuss the family's goals, dreams, fears, and so on so that the objectives of the portfolio will accurately reflect the family's wishes.

At the end of the day, for the bulk of their portfolios, most families will want to focus more on the return of their capital than on the return on their capital. It's not that high returns are unimportant—it's that private capital is irreplaceable. Most families who have accumulated a great deal of liquid wealth are no longer in the wealth-producing phase of their family history. Indeed, the reason they have the liquid wealth is because they have sold the family business.

Contrast this with institutional capital. If a university endowment experiences dismal returns and its capital has shrunk relative to inflation, the university will simply gear up its advancement office and mount a capital campaign. If a pension plan performs poorly, the sponsor company will simply be required to inject capital ...