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There are many things that I can be proud of since we started Cape May in 2024. But one of the facts that I am most proud of is how our name has become synonymous with the Aspirational Investor Framework. As outlined last week, it is not a Framework that we developed - that honor goes to Ashvin Chhabra and the eponymous book in which he first shared the Framework. But where I am quite certain is that we might be one of the most prominent supporters of the Framework in Germany and likely even far beyond that, having since put it into action in our wealth concepts for 60+ affluent individuals ranging from HENRYs to single family offices managing nine-figure sums.

Generally, we found our Framework-driven approach to be best suited to affluent investors that demonstrated two criteria: One, that they are self-driven, meaning that they take care of their investments themselves, or outsourced parts of their assets to a trusted partner like us. Two, that they are not full-time investors. While they all have clear investing experience, they either couldn’t or didn’t want to spend all of their time taking care of their finances, instead prioritizing other entrepreneurial projects or private matters where they likely also generate better Alpha.

So why did they end up reaching out to us? Typically, it’s that they ‘hit a wall’ after two to three years of self-driven or ‘assisted’ investing. They bought a few stocks, a few ETFs, invested in venture and crypto. But eventually, they wondered how all these asset classes, those puzzle pieces, could really fit together. And that’s where they didn’t find a satisfactory answer: It’s when they would talk to the banks and traditional wealth managers we spoke about last week, who relied heavily on model portfolios which made quantitative sense but didn’t fit the individual goals and needs of a given investor.

All those clients were looking for an approach that went beyond numbers and figures. They wanted an approach that made it clear to them how their goals, preferences and needs could be reflected in their individual portfolio. A task that the Aspirational Investor Framework is perfectly suited for.

Today, let us share with you two stories of how we put the Framework into action - but also highlight a few areas where we as busy practitioners are still finding challenges that we hope to solve in the future.

(The following examples are based on real stories, but might have been slightly changed in order to maintain the individual’s privacy.)

A few years ago, we met an affluent individual who had successfully sold their business for a low eight-figure amount. Since the exit a few years back, they’d been very active as an investor, buying not only a personal property, but also investing substantial sums into both venture capital funds and direct venture capital investments. As the 2019-2021 tech craze came to an end, they reached out to me to assist them with two tasks: One, provide a critical review of their overall setup, and two, see how they could add additional exposure to private equity - where they had only made limited investments so far.

Frequent readers know that one of our key priorities is ensuring that our clients can always maintain their lifestyle. More precisely, we do this by properly sizing and constructing their Market Bucket (according to the Aspirational Investor Framework, of course!) so that they have the highest probability of generating the required income over 10, 30, or 50 years. When we probed the client about their priorities, being able to sustain their lifestyle expenses from their portfolio also came up as one of the most important topics.

But when we looked more closely, it turned out that this priority was not at all reflected in their portfolio construction.

First, they had assessed their annual income requirement as a percentage of their overall net worth. However, in their case, most of their net worth was locked up in a minority stake in their prior business, their private residence, as well as a number of illiquid Aspirational Bucket investments. However, the only assets they could actually generate (liquid) income from were the liquid assets in their Market Bucket - which made up only a fraction of their wealth.

In the prior calculation, their income requirement was measured as a percentage of total net worth - the result seemed comfortingly achievable. But when the income requirements was calculated as a percentage of their Market Bucket, the result looked very different - and highly unsustainable (about 10-12%+). And that was even without taking into account the more complex 50-year view that we would usually take, which also takes into account parameters such as inflation or expected tax burden.

All of a sudden, our client found themselves in a very different situation. They had thought that they were in a stable, financial situation, when actually they were at real risk of running out of money in the next 5 to 10 years. The topic of private equity, which had been one of their main reasons to contact us, was also off the table.

While we usually focus on how we can best achieve a given target return for a client with the least amount of risk, we had to change our approach. Instead, we needed to take a look at how we could extend their runway as long as possible through a number of means, including increasing their income, decreasing their ongoing expenses, as well as liquidating illiquid Aspirational assets.

We also had to make changes to their existing portfolio. Our client had invested based on their risk tolerance - which as a former tech entrepreneur was unsurprisingly quite high, leading to an equity-heavy portfolio. But a high-risk, high-reward portfolio with potential substantial drawdowns was something they simply couldn’t afford at this stage - even a modest drawdown of 20 to 30% might cost them multiple years of an already short runway. We went to derisk that client portfolio by adding less risky asset classes without entirely giving up returns for the upcoming years. There was also one thing that was very shocking to me: The advisor that they had previously worked with knew that income was one of their key requirements - but had never even done a simple runway calculation, i.e. comparing annual expenses to their investable net worth.

To make one thing clear: None of the investments that they made were bad investments - if anything, quite the opposite. But long-term, high-risk, high-reward venture investments are not something you can afford when you are only drawing income from your portfolio if your Market Bucket is not yet sufficiently full. As we’ve explained before, the Aspirational Bucket, if you’re given a choice, is the last Bucket you should start thinking about.

Thanks to the Framework and our support, and admittedly some luck in regards to exits in their Aspirational Bucket, they are no longer months away from running out of money. But there is still work to be done, and we are there to support them.

Many of the affluent entrepreneurs that we work with have hit a professional jackpot. They have reached a level of wealth that  is hard, if not impossible to achieve through sheer work. For the individuals in the 2-25M€ segment that we work with holistically at Cape May, such an exit means that they likely never have to work again (unless they want to) as long as they keep their expenses reasonable - think 5-15K€ per month.

But there is another group of individuals - the lucky few that have really hit it big, earning high double, if not triple-digit millions from their businesses. At that level, money is often not only a blessing anymore, but can also be a burden. Can, or should, you just invest that money into a boring ETF, or do you now need to make use of alternative asset classes only available to your echelon of wealth? How much money should you spend every month if you know you’ll likely never run out of money in your lifetime? And are you at a level yet to make some more irresponsible purchases, like flying private? Those are, without a doubt, luxury problems, but they are a burden nonetheless.

Let us also make this more practical. A while ago, we were introduced to an extremely successful entrepreneur. They had founded/acquired and sold multiple businesses, building a considerable, high-double digit fortune. Like the client in my prior story, they came to us not on “Day 1” but after a few years of taking care of their investments themselves and were looking for a fresh, neutral view that could perhaps highlight some areas of improvement for them.

There was also little wrong with how they were invested, already following many of the recommendations around asset allocation and cost-efficient implementation that we would’ve otherwise given them. But as we got to know them a bit better, we realized that their concerns were of a different nature: That despite having built a truly life-changing fortune, they were still worried that all of that could be gone tomorrow. They were worried that a black swan event would wipe out their diversified portfolio. That the financial authorities would take away their money over some incorrectly structured US investment. Or that a representation in a minor company sale could expose them to life-changing financial liabilities. In other words: They felt like they weren’t taking the risks they were willing, and unlike our other client, able to take.

Until our independent review, they had mostly relied on the traditional, quantitative asset allocation models. Given their background, those models also made ‘technical’ sense to them. But like many other affluent investors, they struggled when it came to actually applying those models to their individual goals, or in their case, fears. 

Once again, the Aspirational Investor Framework came to the rescue. By breaking their assets into Safety, Market/Income, and Aspirational Bucket, they were for the first time ever able to actually see how well they were set in regards to their specific, individual goals. With a generously sized Safety Bucket (including multiple private residences across the world), they knew that they would easily be able to withstand any type of market shock and geopolitical crisis. Furthermore, we recategorized certain investments from which they saw non-financial tail risk (like legal exposure or tax risk) into the Aspirational Bucket, giving them an even clearer split according to their understanding of risk.

Most importantly, however, was the Market Bucket - or in their case, an Income Bucket. Unlike the prior client, this individual was at little to no risk of running out of money in their lifetime. But they were still worried by the residual risk, especially in regards to non-market factors, for example taxes, geopolitics, or structural questions. And while they had heavily optimized other parts of their wealth (i.e. finding the perfect jurisdiction or entity to hold a private equity fund), we actually convinced them to go the other way: Distribute the capital needed for their ‘Income Bucket’ from their holding company to the private level. And then invest it into a diversified, low-risk portfolio held with a bank in a ‘safe’ jurisdiction that would also handle their tax and reporting obligations. Was this rationally the most efficient way in regards to factors such as custody fees or taxes? Absolutely not - but knowing that they had this unoptimized, low risk ‘Income Bucket’ to ensure that they could always rely upon, finally gave them a sense of security that they previously didn’t have.

Today, they’re making use of their aptitude for investing, having made some further, truly astonishing deals over the years - because they finally feel safe that they can afford to make such bets. But also because Cape May is at their side to be a neutral, second opinion to assess whether a market, tax or legal risk is really worth losing sleep over.

The Aspirational Investor Framework is a great tool, but it can’t solve all issues. It is a mere first step aligning an investor’s assets with their respective goals, which then requires traditional, more ‘technical’ analysis in topics such as investment strategy or tax structuring. So in the spirit of transparency as you know from this newsletter, let us share with you a few challenges that we’ve since encountered in our implementation.

First, redundancies and challenges in categorization. By nature, the Aspirational Investor Framework is a goals-based investing approach, matching a specific goal (i.e. a need for a safety buffer for emergencies) with a certain amount of certain assets (i.e. a corresponding amount of cash or short-dated bonds). 

As a consequence, perhaps driven by how we use the Framework, certain assets might appear more than twice, which can be confusing to clients. For example, liquidity might appear in the Safety Bucket, but also in the Market Bucket as cash earmarked for capital calls. Public equities might show up in the Market Bucket when invested in a diversified portfolio, but might also be purely in the Aspirational Bucket in the case of a concentrated stock position.

And there is the frequent question around how to categorize certain assets. Take for example venture capital. VC funds could be categorized in the Market Bucket if part of a diversified portfolio. But if it’s just an individual fund, or a small number of direct investments, I would categorize them into the Aspirational Bucket as either investment would retain the substantial default risks of the asset class.

Personally, I’ve found the most straightforward approach to categorize an asset according to how it is implemented. If it is diversified, it can typically go into the Market Bucket. If not, it goes into the Aspirational Bucket. But that comes with another challenge, as it would require us to think about implementation of an asset class at a stage in the process where we typically don’t talk about specific products at all.

Second, institutional-grade portfolios. We want to help investors, whether large or small, to be more institutional in how they invest. In other words: Anything you do in a certain asset class should be as if you’re opening your doors to outside investors tomorrow. So going back to the example of venture capital, your sourcing, your portfolio management, and your ongoing reporting should be as if you are a small venture capital fund yourself.

But admittedly, when it comes to being institutional in your asset allocation, the Aspirational Investor Framework starts to feel… insufficient.

If a client has a nine-figure fortune and reasonable annual expenses, separating some money into the Safety Bucket or even the Market Bucket starts to feel meaningless unless there are clear (psychological) benefits to the client, as was the case in our prior example. At those levels, where there’s often also a staffed family office, the Framework’s more ‘pragmatic’ approach starts to feel a bit too high-level. Instead, a family office team might instead look to more quantitative approaches, such as factor-based portfolio models more akin to what institutional investors use. That doesn’t mean that the Aspirational Investor Framework can’t also be valuable at this level of wealth, as we saw above - but understandingly, its somewhat simple nature might not be enough for some investors anymore.

Despite those challenges, our verdict is clear: The Aspirational Investor Framework continues to be our preferred approach to helping affluent clients think about their assets. Goals-based investing is not only more approachable for the everyday investor, I’ve also experienced it as the ideal way to help clients better understand what risk level is truly appropriate to them - not an easy task when it comes to risk-tolerant entrepreneurs. 

So until I encounter an approach that I deem superior, I will focus my efforts on elevating the Framework through further emphasis of institutional-grade approaches to asset allocation. There’s a lot out there for me to learn - and you can be sure that I’ll share my learnings here with you on the newsletter. So with that: Until next year, when we can hopefully share some more practical experiences with the Framework.

Looking to implement the Aspirational Investor Framework for you and your family? 

Over the last three years, we’ve prepared personalized wealth concepts for 60+ affluent individuals and family offices, each including our practical application of the Framework. We’d be happy to help you as well, outlining individual ‘quick wins’, areas of improvements, or blind spots that you might’ve missed. Reach out for a first call with me:

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.