Welcome to this week’s edition of Cape May Wealth Weekly. If you’re new here, subscribe to ensure you receive my next piece in your inbox. If you want to read more of my posts, check out my archive. The first version of this article was released on LinkedIn in 2023 and in the newsletter in 2024 and 2025. This version of the article has been substantially reworked to show how we think about Investment Objectives today, taking into account two years of practical application with 50+ clients.

Most affluent investors that we meet think they know what they want from their portfolio: Higher returns. 

Nine or ten percent sounds great. “Low double digits” sounds even better.

But interestingly enough, while almost all of them start with an objective of achieving the highest possible return in their portfolio, almost none of them end up with maximum returns as their final goal. If anything, most of them end up with a lower expected return than what they started with. In my view, there’s two reasons for this. 

First, by the type of clients that we (typically) work with. They tend to be young, well-educated (tech) entrepreneurs, who often invested in almost all asset classes (think equities, crypto, PE/VC, and real estate) even before their exit. They are early in their life, have reasonable living expenses, and a long time horizon. 

In other words, they typically have a very high risk tolerance. But as we’ll touch upon later, risk tolerance is often much higher than the risk level that a client actually requires - leading them to taking less risk in their wider portfolio to either reduce complexity and/or to take more risk in more entrepreneurial ways.

Secondly, because they never actually asked themselves what they want to achieve with their newfound wealth. Yes, higher returns sound great. But when we dig a bit deeper and try to understand their personal motivation, and what they really care about, their main goal in life and their portfolio - their Investment Objectives - often looks very different. Yes, money is almost always an important factor. But very often, it’s not the only one. And if there is no difference between 6, 8 and 10% annual return to a client’s lifestyle, but rather just more complexity and effort, many sooner or later end up rethinking their approach.

So today, let’s talk about how you as an affluent investor should think about these matters. Let’s talk about Defining Your Investment Objectives - covering the well-known quantitative goals, but also the qualitative goals that often get less attention than they deserve.

In my personal experience, most wealth managers and private banks try to keep the task of finding a client’s Investment Objective(s) as simple as possible. At best, they might ask their client what they want to achieve with their money in one of the first meetings. In the worst case, they might not even ask that question until they are legally required to do so in the account opening process. Either way, there are typically three main goals that are offered to clients:

In theory, those goals are a good first start. They give you an idea of what a client’s overarching goals are, and help avoid obvious mismatches between investor and portfolio (i.e. an income-oriented investor should likely not have a 100% stock portfolio - at least in our view).

Practically, we find that approach challenging - because these objectives are typically not mutually exclusive. An investor focused on growing their portfolio might also want to ensure that the portfolio’s potential loss in a drawdown is limited (i.e. Capital Preservation). Equally, an investor looking to draw income might still be return-oriented in some parts of their portfolio. Forcing them to make the choice of one overarching objective might lead to a case where they give an answer simply to ‘check the box’, but which might not actually explain their individual situation.

We solve this challenge in two steps: First, by asking more granular questions (more on that below). And two, by using the Aspirational Investor Framework (although you can use any other approach to goals-based investing), through which clients don’t end up with one overarching goal that might just give a partial picture, but rather multiple goals, which can be properly reflected across their wider portfolio.

Despite my critical view of a ‘one-goal approach’, I will admit one thing: Asking a client for their overall Investment Objective can be very insightful - because it gives them a chance to tell why they chose it. In doing so, they provide us with the background, experiences and “story” behind their decision, helping us shape the process while also highlighting potential conflicts between their choice and the realities of investing.

As mentioned above, our process is much more granular. We divide our questions into two categories - quantitative investment goals, and qualitative investment goals.

Most people invest to make money. Accordingly, asking a client for their target return usually gets the same answer: As high as possible, of course. A return target of 10% is actually quite common - feels higher than your (expected) 8% p.a. return on equities, and double-digit rather than single-digit also seems to have a psychological attraction to it.

But while most people are aware that higher returns bring higher risk, and are also psychologically capable of bearing higher risks (i.e. they don’t lose sleep over a 2% drawdown), few actually ask why they want that higher return, besides the fact that having more money feels good to them. And more importantly, almost none of them actually wonder what return they actually need.

We wrote an entire piece on how we calculate Target Returns (see How To Spend It). We define a client’s lifestyle spend and adjacent expenses (i.e. operating costs or a mortgage) their time horizon (50+ years), and their setup (i.e. split between private and entity level, and the resulting tax consequences), and then put that figure into perspective of their investable wealth. This gives us two expected return figures: one required to maintain their wealth after distributions and inflation, and one required to ensure they don’t run out of money over the expected time horizon (i.e. to ‘die with zero’). Of course, that is just a model calculation, and inputs and results will likely change substantially over time. But it gives clients an idea of whether they are on track or not - an ‘answer’ that they often don’t have until they start working with us. (If you want to understand what return you actually need, not just want, that's one of the first things we work through with new clients. Reach out if you'd like to explore that.)

This Target Return tends to be a great starting point to discuss the other quantitative investment goals. 

First, ‘basic’ risk metrics such as volatility or drawdown. In most cases, a client’s Target Return is well in range of their risk tolerance, and also, their current portfolio. If anything, client portfolios tend to have too much risk relative to their required return (think 100% equities for a 4-5% p.a. target return), meaning that they can actually reduce risk in their portfolio without endangering their long-term income requirements.

Second, risk metrics regarding active management. That includes metrics applicable to traditional public managers, such as tracking error, but also less obvious but related metrics such as illiquidity - which is typically incurred from active managers in illiquid asset classes such as PE or VC. Most investors focus on the potential upside of active management, but rarely on the average return or even the downside - but knowing your Target Return lets you build a portfolio with a share of active management that in the worst case ‘only’ might take your overall portfolio to its lower-end Target Return (for example what is required to ‘die with zero’) while having the chance to generate substantially higher returns in a base or upside case.

Third, diversification - and its opposite, concentration. Most of our clients made their money by taking on the binary risk of a single company or venture. With their newfound wealth, they want some diversification, but often still want a degree of concentration for the chance to add another zero to their net worth. A Target Return helps resolve that tension: rather than investing everything into moderately risky assets, a client can split their wealth into a lower-risk core portfolio on track to hit their required return, while allocating the remainder to concentrated, higher-risk “Aspirational” positions.

Our general bias is simple: achieve your required return with as little risk as necessary. If you can hit 5% with a diversified stock/bonds portfolio, we’d do it that way and not add complexity through PE or other illiquid investments.

Quantitative factors tend to be what dominates the initial thoughts of a client on their asset allocation. But what fewer investors (and the banks and advisors that support their process) consider are the qualitative factors that are often equally, if not more, important.

First, their ‘overarching’ goal. It might be a bit similar to capital appreciation, capital preservation, and capital income as mentioned above, but tends to have more of an emotional driver behind it:

This overarching, personal goal is often underestimated, because it tends to be a much bigger driver of an individual’s happiness than having a bit of money. To give a practical example: One client that we worked with made ~15M€ from their exit. But even before working with us, he decided to proactively reduce complexity in his wider investments. In their view, having 15M€, 20M€ or even 30M€ wouldn’t make any difference to their lifestyle, but the complexity of having a chance at a relatively higher fortune simply wasn’t worth the effort to them. Instead, they focused on incubating a number of companies - which funnily enough will likely end up making them more money than any conventional investment would make them. But more importantly, seems to give them a lot more satisfaction than any PE fund or ‘passive’ venture investment could’ve ever given them. (For two more practical examples of how personal preferences ended up ‘overshadowing’ conventional approaches to asset allocation, take a look at Revisiting the Aspirational Investor Framework.)

Second, philosophical preferences - all non-financial factors that affect an investor’s investment decisions. 

One frequent point is ESG, where investors exclude or highlight investments that are aligned with their personal preferences around those three factors. However, there are also “non-moral” personal preferences around asset classes or strategies. For example, some German clients like real estate as “Betongold” (concrete gold). Some clients like (or dislike) crypto for its intransparency, complexity, and decentralization. Yet others love or hate VC or PE. There is no right or wrong to either of these answers, and we try not to impose any personal preferences on those views onto clients. The more individuals we advise, the more I see that there are clear arguments to be made for and against each asset class, also independent of their wealth.

Third, operational preferences. Once the millions hit your account, it often takes little time to start investing - rarely is there any shortage of opportunities. What investors quickly learn, sometimes painfully, is how time-consuming portfolio management actually is. The decision of insourcing versus outsourcing - managing investments yourself, outsourcing to an advisor, or even setting up your own family office - needs to be made deliberately. More than once I've seen self-directed clients realize they're spending more time with partnership agreements and tax advisors than with actual investing. But I've also seen private banks and wealth advisors who weren't worth the fees they charged, and more than one family office fire staff because the overhead created more headache than it solved. (If you're wondering whether your current setup is actually serving you well, that's exactly the kind of question we work through in each client's individual wealth concept. Reach out to learn more.)

Fourth and last, complexity. The world of investing offers an almost unlimited degree of it - but complexity is not necessarily good. It simply makes things more complicated, with no guarantee of lower risk or higher returns. Having worked through the simple and complex version of almost every relevant investment topic — tax structure, asset allocation, in- vs. outsourcing, liquid and illiquid investments - I would almost always pick the simpler option today, unless there is a clear quantitative reason (i.e. higher returns and/or lower risk) and a qualitative one (genuinely worth my time) to do otherwise. (For more on this, see What's Your Alpha.)

My answer is likely unsurprising: There is no right or wrong approach. It’s the set of objectives that best fits your individual experience, preferences, and desires. And it will likely change over time as you continue on your journey as an investor.

We often read in financial media that a certain investment or asset class is the place to be right now. Right now, it’s defense and AI. Previously, it was crypto. Sometimes, such “predictions” might be true, and investors, both new and old, try to see how they can implement such thematic investments into their portfolio.

To me, that is the wrong way to go. The much better way is to think about your goals first by mapping out what you want to achieve, including about how much risk you want to take, before then thinking about which asset classes might be right for you. Then, and only then, should you consider individual investments - including trending thematic investments.

Take AI, for example. Leaving aside NVIDIA and other tech stocks, you’d likely best access the theme through individual venture capital investments. Venture capital requires significant manager selection skills, and is very illiquid (think 10+ years), and can require a lot of time investment. Does that align with your goals? If the answer is yes, you can consider it - but if not, you might be better off not following that trend, even if it’s all the hype right now.

Accordingly, our recommendation: Take the time, maybe even a weekend, to answer those questions for yourself. Put them aside, and review them critically a week later. I promise that the effort is worth its time. 

Not sure whether your current investment setup actually reflects what you want, and need, from your portfolio?

Most investors we meet have never gone through the process of systematically defining their Investment Objectives. We'd be happy to walk you through ours - covering both the quantitative side (target return, risk, liquidity) and the qualitative side (your real goals, preferences, and how much complexity is actually worth it for your situation).

Cape May Wealth Advisors is a Berlin-based wealth management firm focused on helping affluent entrepreneurs find financial independence. If you are interested in learning more about how we can help you, reach out to us via email, and make sure to subscribe to our newsletter.