Investing Education

Use Private Equity Real Estate to Meet Personal Investment Goals


Ups and downs are roiling the markets. The latest jolts came election night as the market see-sawed hundreds of points. But if it isn’t politics, stock market swings can be spurred by everything from bad jobs reports to mixed corporate earnings.

As markets grow unpredictable, investors are turning towards goal-based investing. It’s a strategy that focuses on reaching certain objectives at different times, and has taken off in the wake of the financial crisis, reported CNBC. It’s an approach that can make optimal use of private equity real estate and this asset class’s healthy returns because it is a long-term strategy.

Goal-based investing centers on estimating how much to save, and for how long, to reach specific personal investment goals, such as sending children to college, buying a second home, generating retirement income or even endowing future generations. Mini-portfolios that allocate funds for each goal are targeted to enable investors to reach a budgeted amount by specific dates.

According to CNBC, the 15-year-old practice marries modern portfolio theory, the foundation of most asset-allocation strategies, with investor behavior. Advisors look at life goals to suggest a mix of assets designed to generate the right returns at the right time.

For instance, private equity real estate can tie up principal for several years. So advisors create asset portfolios to match the duration of each goal. These investments can be ideal for long-range needs, while more imminent goals, such as funds for a business deal or a new car, would be parked in more liquid assets.

Advisors gauge a portfolio’s progress on its performance to meet these specific personal goals versus beating the market or getting the highest possible return. By breaking down portfolios this way, despite market twists and turns, an investor may still be on track towards meeting their objectives.

Separate portfolios can also make asset allocation more tangible and easily managed. That’s because investors can watch separate portfolios and more easily tell if they are meeting their targets.

Of course, most investment plans have time-based goals. Yet most portfolios are managed as one big pot of money, mixing conservative and growth investments to meet multiple objectives and achieve maximum rewards.

With goal-based investing, the reward isn’t earning a premium on the investment, although its long-term approach can lead to this outcome. It’s knowing the money will be there when it’s needed, as my partner David Scherer just pointed out on TheStreet.

It “makes periods like 2008 incredibly easy to handle,” says Jean Brunel, author of “Goals-Based Wealth Management” (Wiley, 2016) and the former chief investment officer of JPMorgan’s private banking division.

The long-term nature of the strategy works well with private equity real estate and other alternative investments to smooth the up-and-down cycles of stocks and other equities.

Goal-based investing also redefines risk. In this approach, risk is “the probability of not achieving your goal” rather than a shortfall in returns, notes Brunel. The basic question becomes: Which asset classes grow the nest egg fast enough, and which preserve it?

This can encourage investors to play it safe with assets under their direct control, but be more dispassionate, and perhaps set higher profit targets, with alternative investments such as real estate. Lengthy efforts, such as saving for college tuition, can be locked into growth investments early on, then shifted to more liquid assets or accounts as tuition bills loom.

A retirement plan built on goal-based investing might divide assets into several short- and long-term buckets, says financial planner Harold Evensky, author of the e-book “Hello Harold” (Amazon, 2015). One bucket would set aside short-term cash for living expenses; a second could preserve the nest egg with stocks and bonds; and a third may take advantage of alternative investments to replenish savings.

The purpose-driven nature of goal-based investing also helps rebalance a portfolio. If returns are falling short of expectations, investors have a good idea of where they are headed and enough time to reallocate assets.

This article is intended for informational and educational purposes only and is not intended to provide, and should not be relied on, for investment, tax, legal or accounting advice. The information is provided as of the date indicated and is subject to change without notice. Origin Investments does not have any obligation to update the information contained herein. Certain information presented or relied upon in this article may come from third-party sources. We do not guarantee the accuracy or completeness of the information and may receive incorrect information from third-party providers.