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The Journal of Wealth Management

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Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide

Franklin J. Parker
The Journal of Wealth Management Summer 2020, 23 (1) 8-21; DOI: https://doi.org/10.3905/jwm.2020.1.102
Franklin J. Parker
is chief investment officer at Bright Wealth Management in Dallas, TX
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Abstract

Although the goals-based investment literature has grown, there remain two unsolved problems. First, there is no cohesive theory for the allocation of wealth across goals. If, for example, a client wants to retire in 30 years, send a child to university in 8 years, and buy a vacation home in 4, how she should divvy her wealth across those goals has been an open question. Restating the same problem: The vesting of shorter-dated goals carries a loss of achievement probability for longer-dated ones. How much probability loss is acceptable? Second, mean-variance portfolios yield lower probabilities of goal achievement than goals-based portfolios. I demonstrate use of the goals-based method. Parker (2020) introduced a cohesive goals-based allocation model that solves these problems. The approach, however, carries some practical challenges that are addressed in this discussion. Finally, I discuss some possible implications of the approach on the structure of firms, the regulatory environment, and the industry as a whole.

TOPICS: Wealth management, behavioral finance, portfolio theory, portfolio construction

Key Findings

  • • Recent breakthroughs in goals-based portfolio theory now direct how wealth should be rationally divvied across goals, as well as how wealth should be allocated to investments within goals. This discussion is a “how to” for practitioners operating in a goals-based setting.

  • • Goals-based wealth allocation results in higher probabilities of goal achievement relative to mean-variance optimization. Though mean-variance portfolio allocation can be adapted to a goals-based context, it yields lower probabilities of goal achievement.

  • • There are numerous implications for the industry under a goals-based paradigm. High-variance, low-return investments may yet play a role in portfolios, the line between investment manager and advisor is now fuzzier, and the regulatory ossification of mean-variance portfolio theory creates hurdles for goals-based practitioners.

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The Journal of Wealth Management: 23 (1)
The Journal of Wealth Management
Vol. 23, Issue 1
Summer 2020
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Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide
Franklin J. Parker
The Journal of Wealth Management Apr 2020, 23 (1) 8-21; DOI: 10.3905/jwm.2020.1.102

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Allocation of Wealth Both Within and Across Goals: A Practitioner’s Guide
Franklin J. Parker
The Journal of Wealth Management Apr 2020, 23 (1) 8-21; DOI: 10.3905/jwm.2020.1.102
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  • Article
    • Abstract
    • AN INTRODUCTION TO THE THEORY
    • POSSIBLE IMPLEMENTATION
    • GOAL ALLOCATION WITH MEAN-VARIANCE CONSTRAINTS, AN ADAPTATION
    • EVOLUTION OF GOALS THROUGH TIME
    • IMPLICATIONS OF THE GOALS-BASED APPROACH
    • ADDITIONAL READING
    • ENDNOTES
    • REFERENCES
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