The 3 P’s for Financial Professionals: Perspective

August 23, 2022

In our first blog The 3 P’s for Financial Professionals: Passion we identified your personal, professional and lifelong goals. Now, let’s look at Perspective. The purpose behind perspective is to have a healthy understanding of the investments driving those underlying passions and recognize the risk/return elements of each asset class on your balance sheet. It’s also essential to understand how the goals in your financial plan will complement your investment approach. Further, how do you introduce the idea of perspective to your family? Your significant other may have different thoughts on risk or may be willing to sacrifice certain goals if that translates to less volatility in the portfolio.

Perspective can be discussed through a few different lenses, with the primary roles as follows:

Global Allocation:

Financial professionals have the unique opportunity to invest in a wide array of alternatives, whether through their employer or deals they’re making within their network. These investments inherently come with different risks: lack of liquidity, cost, and potentially large capital calls. The upside is that alternatives can provide a large return at the close of a deal. While we encourage our clients to partake in these opportunities, we must be consistently mindful of the global allocation at large.

The goal of a well-rounded portfolio can be defined as the ‘Core and Satellite’ approach. The ‘core’ represents a balanced, globally diversified portfolio typically consisting of ETFs and mutual funds. The core should be the lion’s share of your retirement nest egg and the focal point of annual savings goals.

The ‘satellite’ piece of the portfolio represents the higher octane or concentrated investments, such as private equity, stock options, or other forms of compensation. These should be viewed as the outliers of risk and return, and while the upside can be tremendous, so can the volatility.

Finding the right balance between a Core/Satellite approach is different for everyone, particularly as it relates to their short- and long-term planning. In general, a healthy allocation to your core portfolio, rounded out with satellite opportunities, can deliver the appropriate amount of growth and risk in a diversified approach. Those who tend to load up on speculative investments without a core strategy to fall back on can trigger unnecessary risk and stress.

Planning Drives Risk:

The driving force behind almost all portfolio decisions is the financial plan. Determining the appropriate equity to fixed income allocations while factoring in the additional alternative opportunities allows you to develop realistic expectations for the goals you want to achieve.  Ideally, you want to land in the sweet spot between achieving enough growth to be successful while managing the downside risk in underperforming years.

When your strategy is set, continue to revisit it throughout the year as goals evolve and change. There might also be new investment opportunities that arise, which require you to come back and consult your plan as well. Will this new investment sacrifice short-term liquidity? Is the success of your plan significantly different if this deal falls through or has lackluster returns?

Your perspective on risk may also change over time, regardless of the goals you’ve set out to achieve. Perhaps you’re nearing retirement and plan to reduce your equity exposure, or you’re balance sheet has accumulated to a point where you no longer feel the need to participate in speculative deals. It’s important to have perspective in those moments and to recognize that as your life evolves, so does that mindset.

Family Perspective:

You’re not alone when it comes to your family plans and goals, so why not incorporate their thoughts and ideas into your perspective as well? Obviously, your significant other plays a vital role in determining your shared needs and wishes, but you can also expand that mindset to your children.

Introducing the idea of gifting, investing, and budgeting from an early age can encourage your kids to have a better perspective on money in general. It also allows them to develop financial literacy and responsibility so that they’re better suited to make sound investment choices as they age.

You also don’t have to limit yourself to just your inner circle. Getting insight from your friends and their families can help mold your perspective over time and help keep you grounded in your core values. Ultimately, if you continue to acknowledge and understand the relationship between your portfolio and planning goals, you’ll set your family up for success.