The Aspirational Investor Framework

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Every client I’ve ever worked with started out with what they thought was their final, long-term asset allocation. 

And every single one ended up changing it along the way. 

The reasons are diverse. One realized that individual venture investments are a lot of work, so they pivoted back to funds. Another realized they didn’t like illiquidity of alternative investments, so they went with ETFs instead.

Why does this happen? It’s because the models used by private banks and wealth managers — the people affluent individuals turn to when considering asset allocation — often fail to reflect the realities of people’s financial priorities.

To be clear, private banks and wealth managers mean well, and they really do help you think about how to invest. I’ve had more than one “eureka!” moment while discussing asset allocation with them. Their internal research capabilities and decades of financial data can take a client’s needs and turn them into a customized asset allocation model that can assess whether the client will have enough money to last a lifetime or to endure various crisis scenarios. Their models are great - on paper.

But in practice, I’ve found them challenging to translate into the real world. They are too theoretical, too static and too inflexible. They don’t take into account how a client is actually going to go about the task of going from 100% cash to their target allocation, or how much time that is going to take them. They can measure risk and return, and show you how those parameters might change if you shift between asset classes. But they aren’t able to tell you how those changes relate to your actual investing goals, or what the trade-offs between those asset classes are. Most importantly, they don’t respond to how a client’s preferences, or perception of risk, might change over time. 

The challenges above are real, and I yet to find a wealth manager that offers a working solution. Instead, I sought my own investment approach - and eventually, I found one that fits with my own investing philosophy.

Introducing the Aspirational Investor Framework

The Aspirational Investor Framework was pioneered by former Merrill Lynch Wealth Management CIO Ashvin Chhabra, who believed the asset management industry’s focus on indexing and ideal benchmarks didn’t respond to the realities of a personal life. Individuals don’t want invest to for the sake of a financial return: They seek to generate returns so that they can pay for their kids’ educations, protect themselves in an unexpected crisis, and fulfill their personal dreams and desires.

As Chhabra explains in The Aspirational Investor (which I highly recommend), the framework incorporates “three seemingly incompatible objectives […]: the need for financial security in the face of unknowable risks, the desire to maintain current living standards despite inflation, and the opportunity for life-changing wealth creation.”

So how does the Aspirational Investor Framework work? Chhabra says investments can be allocated into three “Buckets”:

• Safety: Assets that make sure an investor can always meet their basic needs, regardless of any change in income. Examples include cash, fixed income, a private residence, or insurance policies.

• Market: Assets that allow an investor to maintain their lifestyle by generating returns on the financial markets, offsetting any increases in the cost of living. Examples include public equities, riskier fixed income such as high yield, or real estate.

• Aspirational: Assets that allow an investor to achieve aspirational goals like buying a home or significantly increasing their wealth. These are risky investments with the potential for total loss of capital. Examples include direct investments into start-ups, crypto, or your own business.

The Framework is simple, but can be easily tailored to an investor’s individual goals. Whether that’s through investments in the Safety Bucket that ensure long-term financial wellbeing, or a high-risk, high-reward investment in the Aspirational Bucket that can help create generational wealth, investors are clear on how individual investments serve their personal goals. And lastly, the Framework is also compatible with the scientific approach used by private banks and wealth managers: Once an investor has decided how to categorize his assets into the Safety, Market and Aspirational Bucket, they are still free optimize their portfolio according to optimization techniques used in the traditional, scientific approaches to asset allocation.

The Aspirational Investor Framework in action

So what does the Aspirational Investor Framework look like in practice?

Imagine a tech entrepreneur who just sold their startup. After taxes and buying a new home, they now have about €5m left to invest. They still work for their start-up, with a salary of €150,000 that covers living expenses. They don’t expect to leave this job any time soon.

After the sale of their business, the client has spent time contemplating their Investment Objectives, which has helped them set a number of investing goals for themselves: They want to invest in long-term return-oriented investments. They are familiar with public equities but would also like to start investing in private equity. And lastly, given their start-up background, they also want to allocate 10% to angel investments.

Here’s how they can do that:

Safety Bucket
Since they own their home and have a salary for the foreseeable future, this can be on the more conservative side at €500,000, i.e. three years’ worth of salary. This would be put into safe investments such as investment grade bonds or term deposits.

Aspirational Bucket
They’d like to allocate €500,000 (10%) of their portfolio to angel investments. There are best practices around how and how fast they would invest those funds — personally, I would advise them to act like a pre-seed venture capital fund, which would invest into 50-100 companies over 3-4 years. While they are identifying those opportunities, they can invest the earmarked funds would be invested into low-risk assets, such as bonds or term deposits, to generate incremental yield.

Market Bucket
This is where the remainder of the money goes after deducting the Safety and Aspirational Bucket from the investor's overall net worth. In our example, that’s €4m. In the example at hand, the client would like to start investing in private equity. Here in Germany, the minimum ticket size for private equity funds starts at €200,000, which is sizable relative to their overall portfolio. Accordingly, it might make sense for the client to look into fund of funds, where they are able to more easily diversify by committing to one fund per year until their target allocation to private equity is met and/or their fund portfolio reaches a cash-flow break-even.

There are many other important considerations we can’t cover in full detail here, such as risk management, tax structuring, or the choice between self-directed or ‘outsourced’ investing. The Aspirational Investor Framework doesn’t solve those — but it gives you a great starting point to tackle them. Once you have decided on your rough asset allocation, you have a better feeling for the individual asset classes, and can then work with your advisors to figure out at what level to best hold them to realize your individual goals. 

And you can of course ask your wealth manager what they think of your allocation, and how they might optimize it. After all, they might be the one who put you on your asset allocation quest to begin with.

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