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Is TargetReturn For Me?
| Convergence | FAQs
TARGET RETURN FAQS
What level of return should I target?
The answer to this question is complex. The correct target properly
balances investor needs with portfolio risk and return. But the
components of that equation—expected returns, the level of
risk necessary to achieve return, the degree to which the returns
of different asset classes correlate or not—vary over time.
In addition, a client’s return requirement is likely to change
throughout his or her lifetime, and risk tolerance varies from one
client to the next. Gould works closely with clients to answer this
question.
Why not select a very high target?
If only it were that simple! But remember, a portfolio’s expected
return is the weighted average of the expected returns of its individual
components. If one selects a portfolio target return that exceeds
the expected return of all available asset classes, then obviously
it would not be possible to construct a portfolio with an expected
return equal to the target return. Of course, it may be possible
to select a single high potential stock that will achieve a very
high target return—if things work out. But that does not mean
it is possible to construct a prudently diversified portfolio having
the same lofty target. The bottom line is that you cannot “just
pick a target” that is not feasible in the real world. From
a practical standpoint, higher target returns entail more risk (i.e.,
more variation in year-to-year return). As a result, convergence
will take longer.
The TargetReturn strategy is not a way
to quickly turn small amounts into large ones. Rather, it is a means
for investors seeking long-term, substantial real (above-inflation)
growth of their already significant assets.
What portion of a total portfolio
should be allocated to TargetReturn?
We recommend that clients view their commitment to a target return
investment as separate and distinct from the conventionally allocated
portion of their portfolio. The appropriate allocation will vary
by investor. In general, we believe that clients can prudently allocate
up to 50% of their total portfolio to TargetReturn.
Does the strategy involve traditional
stock picking?
No. Gould implements asset classes primarily through index strategies.
For example, if we decide to invest a portion of a TargetReturn
portfolio in energy stocks, we purchase an energy fund (or a diversified
basket of energy stocks) designed to reasonably mirror the performance
of an energy stock index. Studies repeatedly conclude that differences
in asset allocation explain more than 90% of the variation in portfolio
performance. For this reason, we focus on the asset allocation decision
and do not engage in individual stock selection in this strategy.
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