Investment Planning
Refresher reading access
Introduction
Investment Planning is the process by which investors, asset managers, and wealth managers formulate their expectations for the risk and return of capital assets and markets, build portfolios that match investment objectives and financial commitments with assets available for purchase, and either accumulate or decumulate wealth in accordance with the investor’s stage of life and goals. This reading introduces candidates to the process of investment planning. The section titled “Asset Allocation” addresses the topic of asset allocation and describes how a wealth manager can create and justify its recommendations (including, but not limited to, portfolio allocations, investment vehicles, and hedges) for a private client. In particular, “Asset Allocation” covers the creation of capital market expectations and shows how these assumptions are used for asset allocation. It then addresses portfolio construction and management and stresses the importance of surplus or the difference between assets and liabilities. It also addresses a range of practical issues that must be addressed when allocating assets, including considering the impact of inflation, exchange rate fluctuations, rebalancing, execution, and hedging, as well as the choice of investment vehicles.
Learning Outcomes
The candidate should be able to:
- recommend and justify portfolio allocations and investments for a private client;
- discuss the tax efficiency of investment across various asset types and recommend various tax management strategies for asset allocation;
- discuss and recommend appropriate wealth management planning approaches for retirement from legal, taxation, and jurisdictional perspectives;
- evaluate the success of an investment program for a private client based on portfolio reporting and review.
Summary
- Investment planning is central to successful wealth management.
- A thoughtful wealth manager will take into account both a client’s assets and liabilities when choosing an asset allocation. Ideally, assets will be invested in a way that makes the client’s surplus (or the difference between assets and liabilities) grow as fast as possible in the long run without taking excessive risk.
- Tax law is very dependent on locale, and the extreme variation in tax regimes makes it difficult to create a single, unified set of recommendations for tax optimization.
- All tax regimes levy taxes to varying degrees on income, wealth, and consumption. The taxes are not always uniform—capital gains are usually taxed more lightly than dividends and earned income, and taxaware investment strategies take these differentials into account.
- The financial aspects of retirement can be split into two phases: accumulation, or the building of wealth during one’s working life, and decumulation, or the spending of accumulated wealth in retirement. The decumulation problem is particularly hard to solve on account of the uncertainty in human lifespans and healthspans.
- Performance Evaluation is central to evaluating investment programs and has two components: performance measurement and performance attribution.
- Performance measurement focuses on measuring the return and risk of a portfolio, while performance attribution focuses on understanding the sources of risk and return.
2 PL Credit
If you are a CFA Institute member don’t forget to record Professional Learning (PL) credit from reading this article.