Goal Based Investing – Retirement Solutions

Goal based investing


EDHEC-Risk Institute, along with the Princeton Operations Research and Financial Engineering Department, are in the process of developing new indices to address the key problems in retirement:

  1. Level of replacement income in retirement
  2. Performance of investment strategy invested in a goal-hedging portfolio and performance seeking portfolio

These indices are based on the application of goal-based investing principles to help solve the key retirement problems.


EDHEC has undertaken this initiative because they argue “existing retirement products do not fit with an individual’s actual retirement needs and could be improved by applying Goal-Based Investing principles.”

I agree.  There is much work and improvement to be undertaken in this area.

This EDHEC work goes to the heart of my first post around Advancements in Portfolio Management, Mass Customisation Versus Mass Production – How an industrial revolution is about to take place in money management and why it involves a shift from investment products to investment solutions, and Liability Driven Investing.


It is well worth keeping an eye on the EDHEC develops in this area and I hope to make this a continued focus of future blogs.


Happy Investing.


Please see my Disclosure Statement


Factor Investing Portfolio Construction

Following on from my last post on Factor Investing this article provides some good insights into the implementation of a factor portfolio.

The article makes a few key points:

  1. The best way to capture the different factors is through diversification i.e. diversify across the different factors: value, momentum, size, minimum volatility and quality. Avoid having a single factor exposure.
  1. Although factors work, their performance vary greatly given different underlying financial and economic environments (macro environment).
  1. It is difficult to pick when the macro environment will change to the benefit or otherwise of an individual factor. Therefore, successfully under or over weighting a factor to expected changes in the macro environment offers little value add.  It is nevertheless likely to be more fruitful than making country and sector allocations shifts based on anticipated changes in the macro environment.
  1. There are a number of approaches to constructing a factor portfolio. Most often implemented are equally weighted approach (i.e. equal allocation to each factor) and risk weighted approach.  Risk weighted, in simple terms, starts with an equally weighted portfolio, then reduces the portfolio allocation to the higher risk factors e.g. more volatile factors, and increases the portfolio allocation to the less risky factors (in practice this is a more sophisticated and technically advanced approach).  Whichever approach is implemented, it needs to be consistent with Investor’s risk appetite and investment objectives.

The implementation of a robust factor portfolio is more complicated than outlined above.  There are a number of nuances that need to be considered e.g. level of portfolio turnover and redundancy of portfolio holdings i.e. a portfolio holding could enhance one factor but dilute another factor exposure.


Finally, the article makes a key point, this applies in any portfolio, robust portfolio construction is the key to success in Factor Investing.

True portfolio diversification isn’t easy.  Many portfolios have lots of asset classes, this does not mean they have more diversification.  See More Asset Classes Does not Equal More Diversification, the failings of diversification.

A more robust portfolio is achieved through factor allocation than say sector allocations, so long as there is a broad set of factors to invest in.


Please see my Disclosure Statement