Back to What Matters: An Objective-Based Investment Process

Updated: Jun 28




Investing isn’t a game, it’s a tool to help you reach your financial objectives - financial objectives that are tied to your life’s purpose. Purpose, not money, is the end. How do we take the focus off chasing the highest possible portfolio return and back to Purpose? Objective-based investing brings us back to what matters by measuring performance as a function of progress towards objectives.


We think of Purpose and associated financial objectives not as linear, but circular, continuously evolving as personal needs and wants change. Accordingly, our Objective-Based Investment Process is circular - checking in on a regular basis, making sure client’s investment plan is aligned with their current life vision. Our four-step process aims to identify client’s financial objectives and get them there faster or with lower contribution rates by leveraging investment return.


OBJECTIVE: Identify Purpose and associated individual financial objectives.


LOCATION: Select the correct type of account for each financial objective.


CONTRIBUTION: Forecast deposit rate to reach each financial objective.


INVESTMENTS: Select the most appropriate asset allocation for each location.

IIM: Objective-Based Investment Process


This is a process that is implemented for EACH financial objective and is refined and adjusted as needed. We will always have a flexible plan in place to adapt to client’s evolving needs.


OBJECTIVE

Identify Purpose and the associated financial objectives


Our work with clients starts by discussing what they want most out of life, or their Purpose, and then identify the individual financial objectives that must be achieved to reach their Purpose. Financial objectives are measurable, specific and time oriented. In client review meetings, we provide an update on progress towards each stated objective and check-in to see if anything has changed so we can make appropriate adjustments.


LOCATION

Optimize the type of account for each financial objective


Utilizing the appropriate account for each objective ensures clients have access to the three types of investment return: interest, dividends, and capital gains. Let’s look at several different types of accounts and how they can be used in tandem to increase the probability of reaching your objectives.


Financial Accounts: Types and Uses

*target return; actual performance may vary. Past performance no guarantee of future results.


If you want to participate in the financial markets (either trade pooled funds, stocks, bonds and/or alternatives through an exchange), you will need to open an account through an employer or directly with an investment firm. In general, there are two types of investment accounts: retirement or brokerage. Inside these investment accounts you can buy shares of individual securities or pooled funds.


Retirement – the IRS has created significant tax advantages inside retirement accounts to incentivize building retirement savings. These accounts have annual contribution limits and withdrawals can be made after age 59 ½, although there are certain circumstances that allow early withdrawals, like buying your first house, a hardship, and, in some cases, a loan. There are two types of retirement accounts: Traditional and Roth.


  • Traditional – contribution of before tax dollars (pay taxes later) and the principal grows tax deferred (no taxes on growth each year). When the money is withdrawn after age 59 ½, it is taxed at Ordinary Income. A Traditional account should be used if you want more cash today (less taxes paid), while still saving for retirement. Examples: 401(k), 403(b), 457, SEP IRA, SIMPLE IRA, IRA.

  • Roth – contribution of after-tax dollars (pay taxes today) and the principal grows tax deferred (no taxes on growth each year). If the money is withdrawn after age 59 ½ it is tax free. Use a Roth account if cash flow today isn’t an issue and to guarantee tax free income in retirement. Examples: Roth 401(k) and Roth IRA.


Brokerage – contribution of after-tax dollars (pay taxes today), pay capital gains, interest, and dividend taxes in the year they are recognized, and cash can be withdrawn at any time. Use a brokerage account for major purchases a few years out and, if necessary, to fund retirement before age 59 ½. Brokerage accounts have no tax advantages but offer the most flexibility.


CONTRIBUTIONS

Forecast deposit rate to reach each financial objective.


For each stated objective, clients will need a lump sum of money. We calculate the total amounts of each, and the monthly contribution needed to fund each one. Let’s go through a hypothetical example:


A client wants to buy a $1,000,000 home in 10 years. They currently have $50,000 saved and want a total down payment of 20% or $200,000. Assuming an annual investment return of 6%, they would make 120 monthly payments of $662 into a brokerage account.


Sources: Down Payment


The down payment is funded with approximately 65% contributions and 35% investment return. Note that if a savings account was used the monthly contributions would be around $1,250. By utilizing a brokerage account and proper asset allocation, the client SAVES $585 each month.


INVESTMENTS

Select the most appropriate asset allocation for each location


On November 17, 2021, Netflix (NFLX) was trading at $691.69 fueled by pandemic subscriber growth. On June 13, 2022, it closed at $170.00 - over a 75% decrease in value. If a worker was planning to retire at the end of 2022 and 100% of their retirement assets were in NFLX, they would now have to continue working. So, in a world of uncertainty, how do we increase the confidence level that money will available when needed AND still participate in the potential returns of the financial markets? The answer: we don’t put all our eggs in one basket.


We use pooled funds, which are combined capital from many investors for the purpose of collectively buying individual securities. This enables an individual to own a variety of stocks, bonds, alternatives, and commodities at a lower price point than buying each stock individually. So, an investor just starting out, can benefit from the same diversification of an investor with large amounts of money.


For objectives that are more than a couple years away, we can start to look at investing in pooled funds to generate return and help us reach our objectives with lower contribution rates, while still managing risk. This is done in practice by dividing money up between different types of investments - specifically equity (ownership in something), commodity (raw material or agricultural product) and fixed income (loans to a company or government). Equities and commodities are riskier than fixed income investments since loans come with a promise to pay back principal.


The mix is determined by the amount of time until you need the money. A longer time horizon will have increased exposure to equities and commodities to prioritize growth (aggressive) and a shorter time horizon will have increased exposure to fixed income to protect against losses (conservative).


For an individual or family, there should be a different investment strategy for each financial objective. For example, your emergency fund should be all cash in a high yield savings account, your house fund may be in a brokerage account (invested conservatively), and retirement assets may be in a 401(k) or IRA (invested more aggressively).


THE IIM SOLUTION

Adaptive asset allocation models


Proper asset allocation is imperative to the success of a long-term investment strategy – not risky enough, and you may not keep up with inflation, and too much risk, you may not have enough to fund your objective when the time comes. The good thing is you don’t need to figure this all out on your own. The role of an Investment Advisor is to create a long-term relationship and guide you through this step-by-step. However, it is important that clients understand what they are invested in. Please refer to the below figure which illustrates the importance of strategic asset allocation.


The vertical axis is 10-year average standard deviation - a measure of the magnitude of volatility around average portfolio return. The horizontal axis is the 10-year average annual portfolio return. The five points on the graph are the risk-reward tradeoff of the five IIM Risk-Based Portfolios from conservative (bottom left) to aggressive (top right).


The points create a line that is upward sloping - as we increase risk, we are historically rewarded with higher returns. This is accomplished through a proprietary asset allocation model, which goes beyond traditional asset allocation to include commodities and alternatives. Our commodities position is up 40% this year and is one of the reasons our clients have fared better with us than a traditional asset allocation of equity and fixed income.


How would it feel if you had an automated plan in place to have that amount of money available as each objective approaches? Would you be less stressed? Could you focus on being more present in your life? With your family? At work? Pursuing your hobbies? Our clients have found this to be the case.


We help clients allocate resources efficiently to enrich their lives by reducing stress and pursuing what matters most.


JUSTIN WOLLMAN

INVESTMENT ADVISOR


INTENT INVESTMENT MANAGEMENT

415-717-2661

www.intent.finance

justin@intent.finance

@intent.finance


Intent Investment Management (“IIM”) is a Registered Investment Advisor ("RIA"). IIM’s CRD number is 315111. Registration as an investment adviser does not imply a certain level of skill or training, and the content of this communication has not been approved or verified by the United States Securities and Exchange Commission or by any state securities authority. IIM renders individualized responses to persons in a particular state only after complying with the state's regulatory requirements, or pursuant to an applicable state exemption or exclusion. All investments carry risk, and no investment strategy can guarantee a profit or protect from loss of capital. This presentation is not an advertisement. Investment products offered are not FDIC insured, may lose value and are not bank guaranteed. Periods of more than one year are annualized. Past performance is no guarantee of future results. The returns presented above are net-of-fees and calculated through YCHARTS using the target weights for the IIM Risk-Based Fund lineup – individual account performance may vary. The results reflect the deduction of all investment advisory fees. Investment advisory fees are described in Part II of Intent Investment Management’s Form ADV.

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