Goal-based Investing: Theory And Practice

by Romain Deguest, Lionel Martellini, Vincent Milhau

Overview

Goal-based investing is a new paradigm that is expected to have a profound and long-lasting impact on the wealth management industry. This book presents the concept in detail and introduces a general operational framework that can be used by financial advisors to help individual investors optimally allocate their wealth by identifying performance-seeking assets and hedging assets. Grounded in the principles of asset pricing and portfolio optimisation, the goal-based investing approach leads to the design of investment solutions that truly respond to investors' problems, which can most often be summarized as follows: secure essential goals with the highest confidence level and maximize the chances to reach aspirational goals.A series of case studies guides the reader through the implementation of goal-based investing, illustrates the efficiency of this paradigm and explains how one can accommodate a variety of implementation features such as taxes, short-sales constraints, parameter estimation risk, as well as limited customisation.

Product Details

ISBN-13:	9789811240942
Publisher:	World Scientific Publishing Company, Incorporated
Publication date:	07/27/2021
Pages:	324
Product dimensions:	6.00(w) x 9.00(h) x 0.75(d)

About the Author

Roma in De guest is an Associate Professor of Finance at IESEG School of Management and a member of the LEM-CNRS 9221.

Lionel Martellini is a Professor of Finance at EDHEC Business School, the former Director of EDHEC-Risk Institute and the founding President of EDHEC Scientific Retirement. He is a member of the editorial board of The Journal of Portfolio Management, The Journal of Alternative Investments, and The Journal of Retirement.

Vincent Milhao is Head of Research at EDHEC Scientific Retirement and a former Research Director at EDHEC-Risk Institute.

The authors have published a number of papers in leading journals like Journal of Financial and Quantitative Analysis, Management Science, Mathematical Finance, The Journal of Corporate Finance, The Journal of Portfolio Management and The Review of Financial Studies.

Table of Contents

Preface v

About the Authors ix

Acknowledgements xiii

1 Introduction 1

2 Efficient Allocation Within Risk Buckets 7

2.1 Notation and Assumptions 7

2.1.1 Asset prices 8

2.1.2 Portfolio strategies 10

2.2 Defining Affordable Goals 13

2.2.1 Affordability of wealth-based goals 13

2.2.2 Affordability of consumption-based goals 23

2.2.3 Joint affordability of multiple goals 26

2.2.4 Non-portfolio income and affordability 30

2.3 Taxes and Affordability 44

2.3.1 Taxation principles 44

2.3.2 Affordable goals 46

2.4 Hierarchical Classification of Goals 46

2.4.1 Essential, important and aspirational goals 47

2.4.2 Interpretation and implications of the classification of goals 50

2.5 Building Blocks in Goals-Based Wealth Management 52

2.5.1 Essential goal-hedging portfolios and personal risk bucket 54

2.5.2 Performance-seeking portfolios and market risk bucket 56

2.5.3 Wealth mobility portfolios and aspirational risk bucket 60

3 Efficient Allocation Across Risk Buckets 63

3.1 From Buy-and-Hold to Dynamic Allocation Strategies 64

3.2 Review of the Related Literature 66

3.2.1 Goals-based allocation strategies 67

3.2.2 Expected utility maximisation 72

3.2.3 Comparison of the two strands of literature 89

3.3 Implementation Challenges 94

3.3.1 Strategies without performance constraints 95

3.3.2 Strategies securing essential goals 96

3.3.3 Protecting essential goals in the presence of taxes 106

3.4 Inputs and Outputs of the Framework 109

3.4.1 Inputs 109

3.4.2 Outputs 112

3.5 Mass Customisation Constraints 114

4 Case Studies 119

4.1 Case Study 1 (HNW/UHNW Transition) 120

4.1.1 Current allocation and goals 120

4.1.2 'Static strategies 128

4.1.3 Goals-based investing strategies 144

4.2 Case Study 2 (HNW Retiree) 180

4.2.1 Current allocation and goals 180

4.2.2 Strategies securing essential goal(s) 188

4.2.3 Impact of taxes 197

4.3 Case Study 3 (Affluent Accumulator) 203

4.3.1 Current allocation and goals 203

4.3.2 Strategies securing essential goal(s) 213

4.3.3 Impact of taxes 228

5 Concluding Remarks 239

Appendices 241

Glossary 285

References 295

Index 301