Written on 12 November 2014.
While the efficient management of all risk buckets, versus market risk alone, should be a central component of any investment solution, the practical implications of this insight have not been fully exploited to date.
The traditional product-centric approach, which focuses on allocating more or less to stocks and bonds as a function of some estimated risk-aversion parameter, needs to be replaced by a goal-based investor-centric approach to wealth management. In particular, an investment framework based on risk-aversion, a crude one-dimensional summary of the complex set of investors’ meaningful objectives, cannot ensure that any particular goal that is essential to the investor can be achieved with certainty. In contrast, goal-based investing is a novel investment solution framework dedicated to allowing investors to secure their essential goals, while maximizing the probabilities of reaching their otherwise meaningful goals that cannot be secured with full probability given their dollar and risk budgets. Through an efficient use of dedicated performance and hedging building blocks, as well as a suitably designed allocation to these building blocks, goal-based investing generates 50% greater probability of achieving investors’ important or aspirational goals compared to traditional approaches.
On the occasion of its annual European conference EDHEC-Risk Days, in 2015 EDHEC-Risk Institute will be organising a pre-conference Masterclass on Individual Investor Solutions on March 23 at The Brewery, in London, focusing on these goal-based investment solutions in private wealth management.
The aim of this masterclass is to provide participants with an introduction to the modern financial engineering and risk management techniques which will allow a new breed of investment managers to design and implement innovative forms of welfare-improving investment solutions for individual investors.