Goals-Based Portfolio Theory

An in-depth overview of investing in the real world

In Goals-Based Portfolio Theory, award-winning Chartered Financial Analyst® Franklin J. Parker delivers an insightful and eye-opening discussion of how real people can navigate the financial jungle and achieve their financial goals. The book accepts the reality that the typical investor has specific funding requirements within specified periods of time and a limited amount of wealth to dedicate to those objectives. It then works within those limits to show you how to build an investment portfolio that maximizes the possibility you’ll achieve your goals, as well as how to manage the tradeoffs between your goals.

In the book, you’ll find:

• Strategies for incorporating taxation and rebalancing into a goals-based portfolio
• A discussion of the major non-financial risks faced by people engaged in private wealth management
• An incisive prediction of what the future of wealth management and investment management may look like

An indispensable exploration of investing as it actually works in the real world for real people, Goals-Based Portfolio Theory belongs in the library of all investors and their advisors who want to maximize the chances of meeting financial goals.

Foreword by Jean LP Brunel, CFA ix

Preface: Goals-Based Investors and the Need for Better Theory xv

Acknowledgments xxvii

Chapter 1 The Story of the Idea: How Goals- Based Portfolio Theory Came to Be 1

Chapter 2 A Theoretical Foundation 11

Chapter 3 Allocating Wealth Across Goals and Across Investments 31

Chapter 4 Allocating Wealth Through Time 45

Chapter 5 Real Markets, Real Risk, Real Portfolios 65

Chapter 6 Insurance Through a Goals- Based Lens 85

Chapter 7 Impact Investing 97

Chapter 8 Taxes and Rebalancing 109

Chapter 9 Goals- Based Reporting 125

Chapter 10 Fragility Analysis of Goals- Based Inputs 137

Chapter 11 Human Risks 147

Chapter 12 Prudent Investing with High- Variance Assets: An Experimental Chapter 161

Chapter 13 As a Bridge Between Normative and Behavioral Finance 173

Chapter 14 The Future Structure of Wealth Management Firms 199

Some Final Thoughts 209

Index 219

FRANKLIN J. PARKER, CFA, is the award-winning author of dozens of peer-reviewed articles and trade publications. He is a CFA charterholder, international speaker, founder of a Texas-based RIA, and a strategic advisor to journals, funds, and wealthy families.

In Goals-Based Portfolio Theory, award-winning Chartered Financial Analyst^® Franklin J. Parker delivers an incisive, practical, and even personal exploration of how real people living in the real world can navigate the choppy waters of the financial markets and achieve their investing and lifestyle goals without taking on unnecessary or excessive risk.

The author accepts the reality that the typical investor has specific wealth requirements within specific timeframes and a very limited amount of capital to accomplish those objectives. He then works within those limits—which are, after all, non-negotiable for the vast majority of investors—to show you how to build a portfolio that maximizes your chances of achieving your goals and how to manage the inevitable tradeoffs along the way.

The book explains strategies for incorporating tax considerations into your portfolio management and how to rebalance your holdings within the framework of a goals-based portfolio. It also discusses the major non-financial risks faced by people managing their own portfolios or using retail-level brokers, financial planners, or wealth managers. It also dives into the future of the wealth management and investment management industries, showing financial professionals the new realities they must prepare for if they wish to remain competitive.

An invaluable resource for everyday investors who can’t afford to treat their portfolios as an academic exercise and who don’t have access to the tools used by ultra-wealthy institutions, Goals-Based Portfolio Theory is the hands-on guide to investing you’ve been looking for that tells you what to do, how to do it, when to do it, and why.

HANDS-ON PORTFOLIO MANAGEMENT FOR INVESTORS INTERESTED IN REAL-WORLD RESULTS

Goals-Based Portfolio Theory is a practical roadmap for real people who wish to skillfully manage their investment portfolios and minimize risk in the real world. The book avoids interesting—but ultimately impractical—academic theorizing and the strategies that only work for massive institutions with effectively unlimited resources in favor of on-the-ground techniques and frameworks that acknowledge the limitations in which most retail investors operate.

You’ll learn to redefine risk, contextualize return, and plan for the timed and specific financial goals that everyday investors need and want from their portfolios. The book incorporates tax considerations, goals-based rebalancing and reporting, discusses the major non-financial risks faced by people who manage their own portfolios or use the services of retail-level financial and wealth planners, as well as the surprising implications of a goals-based investment approach.

This book is essential reading for real people in the real-world planning for their very real future who want to maximize their chances of achieving their portfolio goals within a specific timeframe. It belongs in the hands of all retail investors and their advisors.