Four Tasks for 2025

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Happy New Year, everyone! I hope you had wonderful holidays and a great start into 2025. I am excited for what the next 12 months will bring - I hope you feel the same way.

For Cape May, January is an interesting month. There’s of course a number of typical beginning-of-year topics, such as 2024 account reviews as well as getting started on tasks that clients had requested but not needed before the new year. But on the new business side, things actually tend to be slower: Clients are either focused on their operating companies, or they already sold their business and are taking January off, leaving cold Berlin for warmer destinations - where their investment portfolio is typically not their first priority. All in all, it makes for a great month to set our strategy for the new year.

So if you’re looking to make 2025 a great year for your portfolio - what should you look out for? Let us share with you what we think are the four key tasks to get your portfolio in order for the upcoming year.

#1: Reviewing Your Investment Objectives

Before you start investing, you should always consider why you are investing. I tackled this question in Defining Your Investment Objectives - outlining not only your overarching goal (i.e. income, capital appreciation), but also the underlying requirements to achieve those goals (i.e. performance or risk targets).

And as you review what has happened in 2024, you should check whether the Investment Objectives you had set for yourself when you first started investing still apply for 2025.

Say that your objective is Capital Appreciation: You did the math and know that your investment portfolio needs to achieve a certain percentage return every year to ensure that you can achieve your income goals in retirement. 2024 was a great year for equity-oriented portfolios, with MSCI ACWI returning more than three times as much as the annual return you’d expect based on its long-term history. What conclusions should you draw?

First, ask yourself whether your Investment Objectives still apply. Perhaps you just started out on your investment journey, so you’ll have another 20, 30 or 50 years ahead of yourself. Or you might be close to retirement. Either way, great years give you flexibility on how you want to achieve your goals - and as we will touch on more in #4, you might want to think countercyclically and take some money off the table for liquidity needs, or make use of the possibility to reduce your required risk level.

Second, consider whether there are new (sub-)goals that you should allocate for. Maybe one of your children is approaching the college age and you want to support them financially. Or you are looking to move on to your next project which will require some initial capital from your investment portfolio. Think about these goals and quantify them so you can reflect them in any rebalancing and/or liquidity management exercise for the new year. (More on that also in #3).

#2: Reviewing Performance and Expenses

For Cape May, and most banks and asset managers, January is the month of account reviews: Discussing with clients how their portfolios performed in 2024, and whether the manager achieved what they set out to achieve in the last year. If your banker doesn’t proactively suggest such an appointment, you should certainly ask for it.

What should a successful account review entail?

Performance: Clear overview of what percentage return your portfolio generated in 2024 - at the overall level, as well as at the level of relevant sub-strategies (i.e. the equity allocation, the bond allocation, etc.). Make sure that all those figures are net of fees - I continue to be horrified how many banks share performance figures with their clients that don’t include (often substantial) fees.

Benchmarking: Comparison of your portfolio and its individual components with relevant, comparable benchmarks or products. Here, the opposite logic applies: Benchmarks should either be shown without fees (after all, you’d expect an active strategy to outperform its benchmark after expenses), or your advisor should use the low-cost alternative product (i.e. comparing an actively managed equity portfolio with its passive ETF alternative). 

Especially in great years like 2024, comparisons should be made with a grain of salt. Multi-asset managers are more focused on delivering stable, long-term returns, and are thus unlikely to match this year’s outstanding MSCI World or S&P 500 performance. However, it is years like this when you should be sure that your advisor is mindful and gives satisfying answers on why the portfolio performed the way it did - i.e. outlining which tactical underweights and overweights contributed positively, and which ones didn’t. Also consider longer-term returns, i.e. over 3 or 5 years, that include more challenging years such as 2022.

Expenses: Lastly, make sure to know what you are paying for the service you get from your advisor. That includes product or strategy costs, fixed or percentage-based management fees, as well as associated fees such as transaction costs or a custody fee. Make sure to check whether those figures are fair for the level of service you receive: Not only in terms of performance (i.e. did my advisor outperform after fees, either in absolute or on risk-adjusted terms), but also in terms of the service level. More often than not, I see affluent individuals pay substantial fees without receiving an appropriate qualitative return - make sure to use your account review to check whether what you pay is fair, and don’t hesitate to ask whether your advisor sees room to reduce fees. (If you need a neutral opinion on whether the fees you pay with your advisor are fair, feel free to reach out.)

Of course, you should also review the performance of the self-driven parts of your portfolio, such as your fund investments or direct start-up investments. In my past roles, I did so by calculating the performance of each of those parts of our portfolio, and by comparing them to their respective public benchmark - for example, comparing your private equity fund portfolio with MSCI World, by either using the “public market equivalent” approach or by converting the performance of your fund portfolio into a time- and money-weighted figure. Be mindful that for illiquid investments, a one-year time horizon might be less relevant than a 3, 5 or 10-year return.

#3: Liquidity Planning & Management

The next part of our beginning-of-year exercise is forward-looking: Ensuring that you have enough liquidity available for capital requirements in and outside of your investment portfolio.

Capital requirements in your investment portfolio include planned (or perhaps even contractually required) investments, for example capital commitments in your fund portfolio or an ongoing amount that you plan to invest in start-ups. It also includes adjacent expenses such as management fees, and one might also include operational expenses such as legal fees or accounting costs. Requirements might be offset by expected inflows, such as interest or dividend income or distributions from your fund portfolio.

Capital requirements outside your investment portfolio refer especially to your living expenses. In our experience at Cape May, affluent individuals often underestimate their magnitude, as well as how much they increase year-over-year with inflation and lifestyle creep. Other significant expenses include mortgages (split into interest and principal repayment) or charitable giving. Such expenses might be offset by ongoing income from an operating activity or consulting services.

In both categories, investors should be extremely mindful of taxes. Most investors are somewhat mindful when it comes to taxes on their investments, although there is often potential to further optimize a given setup. More crucial are taxes required to make capital in an investment portfolio available for consumption: It might require realizing accrued gains on positions, but in the case of German investors, also often requires to distribute (or lend) capital from an entity (typically a GmbH) to the private level, which incurs further substantial taxes.

All of those expenses, both inside and outside of the portfolio, should be mindfully mapped and monitored. Work with buffers, and ensure you know how much liquidity you should keep in hand to not be required to sell off assets at unfortunate times. For further reading, you can check out my series The Art of Capital Call Management - see Part 1, Part 2, and Part 3.

#4: Portfolio Adjustments & Rebalancing

If you’ve properly conducted steps #1, #2 and #3, you should have clarity on how you stand relative to your Investment Objectives, how your existing investments have contributed to achieving them in the past, and what liquidity needs you have for the year ahead. Now, it is time to reflect that information in your portfolio.

Personally, I would always start with short-term liquidity requirements, as making mistakes here can prove fatal. If you’ve quantified how much capital you need for the upcoming year, I would recommend moving the shorter-term portion of said capital into cash (~3-6 months) while moving the remainder into defensive, short-term investments, such as money market funds or short-dated bonds. Preferences vary significantly here - it is up to you on how safe you want to be, but I definitely recommend a more defensive approach.

Secondly, see if there are any medium-term goals that you start to reflect. If you are looking to buy a personal residence in the next 12-24 months, perhaps make use of the great equity market performance of the last year and move some of your winnings into medium- to long-term-oriented, but more defensive investments, such as fixed income, commodities and/or a multi-asset-portfolio with a lower risk-return-profile.

Practically, you can implement those measures through rebalancing. By selling down equities after their great performance in 2024, you might realize some taxable gains, but also create the liquidity for your upcoming capital needs while likely staying close to your existing portfolio weights - keeping your long-term performance requirement intact while also fulfilling your short-term capital needs. For measures that don’t have a precise due date yet (like purchasing a personal residence), you might choose to sell down equities to reinvest this capital in more defensive asset classes, keeping the same amount of capital invested while bringing down the risk (but also expected return) in your portfolio.

The same also applies in the absence of any change to your investment objectives: If you require a 5% p.a. long-term return but are looking back on a 7% or 10% p.a. performance over the last 5 years, I would recommend that you consider actually reducing risk in your portfolio. While perhaps counterintuitive, higher performance means that you are closer to your goal in a shorter amount of time than intended - and I would always optimize for the probability of reaching your goal (through lowering risk, thus creating higher certainty) rather than the probability of outperforming your goal (through same or even higher risk).

Lastly, consider using rebalancing to make the required tactical, strategic or structural changes to your portfolio. If you are unhappy with one of your banking relationships, consider disproportionately selling down that portfolio for your liquidity needs, and/or relocate assets and liquidity to another banking relationship - and use the additional capital with that bank as an argument to bring down your fees. Or if you have any orphaned positions left over, like an odd single stock or a non-core fund - sell them, simplifying your portfolio while also helping you towards your liquidity needs.

All of the tasks above seem menial - but you might be surprised how few investors actually take the time to review the last year, let alone use it to make decisions about what they should change in your portfolio. They’re a good way to take stock of how your portfolio looks, and whether you are on track to achieve your goals. I hope this little list helps you tackle that task by yourself - but of course, if you are looking for assistance, don’t hesitate to reach out.

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