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. Note from the author: I first wrote about the Aspirational Investor Framework in the summer of 2023, before re-working the series into a newsletter that I published in February 2024, and again in January 2025.
Every client we’ve ever worked with started out with what they thought was their final, long-term asset allocation. And almost every single one ended up changing it along the way.
While the reasons are diverse and personal, there are some recurring themes. One technology entrepreneur took care of their investments themselves, but realized that hands-on, single-stock trading is a lot more work than they wanted to take on - especially as they become operationally involved in a new company they started. Another investor incubated numerous companies, but ended up ‘on the hook’ time- and money-wise for every investment that didn’t go well. Yet another one deployed substantial sums into PE and VC funds, only to realize (after an assessment by Cape May) that the resulting illiquidity might put them at risk of running out of money for their personal spend.
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, it’s not the model portfolios that are the problem - we at Cape May use them too. But it becomes problematic when picking one out of three to five model portfolios is essentially the only financial planning that a client receives from their bank or advisor. In practice, the quantitative, more theoretical nature of such model portfolios is hard to apply to the realities of a client’s individual situation, and the complexities of the real world:
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, especially when it comes to private assets.
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 Investment Objectives, or what the ‘real world’ 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 - perhaps triggered by a review of a prior year’s investment performance.
The challenges above are real. When we launched Cape May, me and my colleagues were unhappy with the traditional, scientific models, and sought an investment approach more fitting of our views. And eventually, we found just the right one: Let me introduce you to the Aspirational Investor Framework.
Introducing the Aspirational Investor Framework
Contrary to what some readers think, the Framework is not an invention by Cape May. Instead, 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 to invest 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 (a book which, unsurprisingly for frequent readers, 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.” It prioritizes a client’s individual situation, goals, and desires, rather than trying to apply the same (quantitative) models used for pension funds or insurance companies.
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. (We’ve recently written a deep dive into how investors should think about their income requirements, including the calculation of their required target return and the resulting sizing of their portfolio - check it out here.)
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, such as direct investments into start-ups, crypto, or your own business. But it is also the part of your portfolio for investments without a purely financial return, such as a holiday home or charitable giving.
The Framework is simple, but can be easily tailored to an investor’s individual goals. Whether that's a well-diversified, income-oriented portfolio in the Market Bucket, or the right balance of high-risk, high-reward investments in the Aspirational Bucket - if done right, 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 can utilize model portfolios that fit the desired risk-return profile of one of the Buckets, or can use optimization techniques to optimize across Buckets.
See the Framework as your first step of the asset allocation process: First, you define your goals. Second, you size the respective Bucket according to the needs and limits of the respective goal. And third and last, you construct the ideal, customized sub-portfolio for each of those goals.
The Aspirational Investor Framework in action
So while the Framework was not invented by us, I am certain that we are one of the leading practitioners of the Framework. As I am writing this article, we’ve supported 60+ clients in developing a personalized wealth concept, which always includes a categorization according to the Aspirational Investor Framework. So how does that look like in action? Let us give you an example.
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, receiving an after-tax salary of €150,000 per year that covers their living expenses (including their mortgage payment) of roughly 10.000€ a month, even leaving them with a bit of additional ‘spending money’ for vacations or lifestyle purchases. They are happy in the position for now, but could see themselves leaving in a few years.
After the sale of their business, the client has spent time contemplating their Investment Objectives, which has helped them define a number of investing goals for themselves:
They want to build a portfolio that generates the long-term returns required so they never have to work again — unless they want to.
They want to invest in public equities according to a sustainability-linked approach.
They would like to start investing in private equity, looking to do so in the most time- and knowledge-efficient manner.
Through their start-up background, they have what they deem to be proprietary, high-quality deal flow, and want to allocate 10% of their portfolio to early-stage direct investments.
So how does the Aspirational Investor Framework help us translate those goals into practice?
Safety Bucket
Since they own their home and have a salary for the foreseeable future, but might want to stop working at some point in the future, we’d earmark two years of salary for the client, i.e. €300,000. (Most clients pick a number between 6 and 24 months.) Half of this would be kept in cash at the prevailing short-term interest rate, the remainder in short- to medium-term, safe investments such as term deposits and fixed income investments.
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 (more on that here and here). While they are identifying those opportunities, they can invest the earmarked funds into low-risk assets, such as bonds or term deposits, to generate incremental yield - similar to the Safety Bucket. (For best practices on liquidity management, check out Lines of Defense.)
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 number would stand at €4.2M. If we apply the best practices outlined in How To Spend It, our rough calculation (4.2M€ investable wealth, 10K€ in monthly living expenses) would imply a required return of ~5,2% p.a. (‘die with zero’) to 6,5% p.a. (capital preservation after withdrawals and inflation). Slightly higher than we would want it to be, but not an impossible figure, especially as we don’t consider a potential contribution from their venture portfolio.
Lastly, our hypothetical client would also want to invest 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. With 4,2M€ of investable capital for the ‘Market Bucket’, it might be tough to build a fund portfolio separate from their liquid, diversified investments. Hence, they should either consider replacing some of their public equity portfolio with either a fund of funds or an evergreen fund, although at a 6,5% p.a. required return, which we think can be achieved with liquid assets, it might not be needed to add additional complexity through PE. Their time and effort might be better spent on their angel portfolio where they can likely generate more Alpha.
There are many other important considerations, such as 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: Rather than having to deal with the challenge of asset allocation holistically, the Framework allows you to break it down into individual building blocks to tackle. These include the right cost for a personal residence in your Safety Bucket, optimizing your ‘separately managed account’ in the Market Bucket, or thinking about crypto in your Aspirational Bucket. Or of course all other questions that might go beyond an individual Bucket, such as your tax structure or the proper use of leverage.
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.
