Table of Contents

• Harry Markowitz: The Portfolio Management Revoluti …

• Goals-Based Investing: What Markowitz Missed

• Implementing Goals-Based Investing in Practice

Happy Sunday Fellow Noyackers!  

(thats our term for our Noyack Wealth Weekly subscriber community)

Welcome to this special edition of Noyack Wealth Weekly! Today, we are thrilled to introduce a new kind of investing—one that puts your personal goals and values at the forefront: "Investing for Love."

Inspired by the revolutionary ideas of Harry Markowitz and his Modern Portfolio Theory, we’ve taken personal wealth management to the next level with our branded approach: Goals-Based Investing, or as we like to call it, "Investing for Love." This strategy is not just about achieving high returns; it’s about aligning your investments with the things you care about most.

Imagine investing for the love of your future self aka securing a comfortable retirement; or for the love of your family by creating generational wealth for future family generations to come; for the love of helping others through philanthropy. At Noyack, we believe in building a future that’s rich not just in wealth, but in meaning and purpose.

Join us as we dive into the principles of "Investing for Love" and show you how to implement this innovative strategy in your personal financial planning. Let’s make your money work for the dreams you love.

Harry Markowitz: The Portfolio Management Revolution 

The basic question of portfolio management is deceptively simple…

What assets should you invest in, and how much money should you put into each asset?

People have been trying to answer this question for literally thousands of years. The Talmud, written as early as 1200 BC, contains what might be the oldest piece of investment advice in history:

“It is advisable for one that he should divide his money in three parts, one of which he shall invest in real estate, one of which in business, and the third part to remain always in his hands.” 

Simple rules of thumb like this survived for a surprisingly long time in the financial industry. In fact, it would take until the pioneering work of Harry Markowitz in the 1950s for people to start looking at portfolio management mathematically. 

Professor Markowitz won the Economics Nobel in 2003 for his contributions to portfolio theory. He passed away last year.

To create the portfolio management system now known as Modern Portfolio Theory, Markowitz assumed the following:

• The only thing investors want is to make more money (defined as high portfolio returns)

• The only thing investors don’t want is to take big risks (defined as high portfolio volatility)

• Therefore, portfolio management is about maximizing returns while minimizing volatility

Economists loved the Markowitz model. Not only did the arguments make logical sense, but the strict mathematical approach helped cut through the noise and focus on the numbers.

In the years following, economists developed a bunch of tools based on the return-volatility tradeoff, including the Sharpe ratio and the Capital Asset Pricing Model (from which we get the terms “alpha” and “beta”). 

But in their haste to embrace Modern Portfolio Theory, economists forgot to ask a simple question…

Are the theory’s foundational assumptions actually true?

Goals-Based Investing: What Markowitz Missed

Modern Portfolio Theory seems sensible at first glance – but when you try and apply it to real people, the flaws become evident.

The idea that investors only care about high returns definitely can’t be true, considering that: 

• Different portfolios have different purposes (like an emergency fund vs a retirement account),

• People often care about the social impact of their investments,

• And non-return features of your investments are still important (like liquidity).

But the risk component is even more flawed.

It’s bizarre to think about volatility as the sole measure of risk. To me, risk means one thing above all else: not meeting my goals!

In fact, the idea that investment portfolios are supposed to help investors achieve their goals (and not just achieve high returns) has inspired a resurgence in a classic approach to portfolio management: goals-based investing.

Why money is a means, not an end

Goals-based investing (GBI) is about viewing your money as a tool to help you build the life you want to lead.

Modern Portfolio Theory says that high returns are the goal in itself – but GBI says that high returns are merely a conduit to help you achieve your goals. 

Here’s how I like to think about it: high portfolio returns are like a pair of good running shoes that help you get to the finish line of a marathon. But high returns aren’t the finish line itself!

What kind of goals can you target with a GBI framework?

Anything you’d like – whether it’s buying a house, a sufficeint or comfortable retirement, or setting your family up financially for generations to come.

You can even set goals specifically targeted at decreasing your wealth over time, like philanthropy and charitable giving.

GBI also encourages us to see goals along a spectrum. Both “needs” and “wants” can be part of our financial strategy.

Implementing Goals-Based Investing in Practice

GBI definitely sounds like an improvement over Modern Portfolio Theory, since it aligns with the way people think about investing in practice.

But what are some of the real, practical changes that result from implementing GBI?

#1: Multiple portfolios, not one portfolio

If maximizing returns relative to volatility is your one goal, then you really just need one portfolio to achieve it.

(By the way, a lot of financial advisors love Modern Portfolio Theory for precisely this reason – they only have to monitor one portfolio!)

But if you have multiple goals, then it stands to reason that you’ll need to set up multiple portfolios. These portfolios might include:

• An emergency fund held in a money market account,

• Saving for a down payment held in mostly conservative investments,

• And retirement savings held in mostly aggressive investments.

All these portfolios are designed to meet a different goal, so they’re all allocated in a different way.

#2: Increased use of alternatives

Alternative investments like real estate, private equity, and venture capital are a natural fit for GBI portfolios.

Think of asset classes like the ingredients that go into making dinner. If you’re just cooking one dish (aiming for one goal), you don’t need that many ingredients. 

But what if you’re cooking a bunch of dishes? The number of ingredients you need in the kitchen rises dramatically.

Similarly, the various characteristics of alternative investments can be assembled in unique ways to assemble portfolios designed to achieve a wide mix of goals.

The power of allocating to alternatives has been known by institutional investors for a long time – but individuals are only just starting to catch up.

#3: Incorporating personal finances with investment management

Finally, GBI provides the missing link between portfolio management and personal finances.

Building the right portfolios is an essential tool to help you achieve your financial goals, but it’s not sufficient on its own. For example, you also need to be smart about saving, spending, and debt management.

If you’ve been in the Noyack community for a while, you’ll notice that I like to talk about both investing and personal financial management.

This is precisely why – because if we’re focused on achieving goals, it’s not enough to simply make smart financial decisions in one area and ignore the rest.

📺 WHAT WE'RE WATCHING

This video from JPMorgan breaks down some of the major alternative asset classes and discusses how their unique characteristics can help benefit a portfolio.

The World of Alternative Investing

👂 WHAT WE’RE LISTENING TO

This episode of Bloomberg podcast At the Money dives into a few of the behavioral quirks that investors display, something which GBI portfolios are better suited to addressing.

At the Money: Behavior for Better Investing

📖 WHAT WE’RE READING

This article from the Financial Times by the former head of the Chilean wealth fund investment committee discusses some of the technical reasons that Modern Portfolio Theory struggles in practice, which expands on the behavioral aspects I discussed today.

Timeless relevance of Markowitz’s ideas for finance and investing

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