Linking Metrics to Objectives: Retirement Saving, Spending, and Active Management

Abstract

Although financial advisors and institutions are increasingly urged to adopt objectives or goals-based investment strategies, there is a need to more clearly define what is meant by investment objectives and their effects on outcomes. In a controlled modeling experiment, the author formalizes two investor personas (Accumulator and Decumulator) and two investment strategies (Target Cash Flows and Target Wealth) to provide a deeper understanding of the effects on investor “success” or “failure.” In addition, applying characteristics that are potentially available in actively managed funds, such as differences in investments in terms of beta, alpha, and sequence of returns, enables the demonstration of several surprising effects, including changes in the distribution of investment returns and, of importance, the trajectory of investor outcomes in an objectives-based framework.

TOPICS: Retirement, style investing, wealth management

Key Findings

• • The sequence of investor returns is a surprisingly large determinant of outcomes, matching the effects of asset allocation.

• • There is a premium to flexibility in goal-oriented cash flows; an adaptive approach may increase the chances of meeting a goal.

• • Too little attention has been given to the importance of actively managed investment strategies in reducing the risk of meeting an objective.