For high-net-worth families and individuals, today’s best investment strategy may not be the optimal approach to take tomorrow. Family offices must continually adapt strategies to suit market complexities, capitalize on emerging trends and opportunities, and navigate towards safe, reliable profit.
There are several ways a family office investment strategy works and several strategies that an office may employ, depending on investor preferences. Here is what to expect from a family office investment strategy.
1. Coordinated Investment Strategies
The purpose of a family office is to coordinate how family wealth is managed, grown, and distributed. Therefore, all parties must agree upon a family office investment strategy, initiating a long discussion on how to make the most from existing wealth.
2. Identifying Goals, Risk Tolerance, And Values
As a family office seeks to outline an investment strategy’s key pillars, investment goals must be discussed. Risk tolerance must be clarified. To an extent, values are also a part of the conversation, ensuring wealth is maintained and grown following the family’s wishes and philosophies.
3. Defining The Liquidity Timeline
The investment goals of a family may be tied to short-term liquidity, or they may prefer long-term wealth preservation at the helm. Which it is will be a guiding force in how a family office crafts strategy and follows through.
4. Risk Management Is An Important Topic
Some families will be willing to accept high-risk tolerance for a potentially high reward, but there’s always a chance that what’s put up can be lost. Risk tolerance is a touchy subject for family wealth. Risk v. reward, the family’s risk tolerance and risk appetite, and how risk should be defined within an investment strategy can all help clarify the best investment strategy.
5. Two Approaches To Investment Strategy Management
Initially, a family office can either be used to invest money on behalf of a family, or they can simply act within a compliance and supportive category, advising the family on how to use their assets but without initiating the moves themselves.
6. Diversified Investing Is At The Center
Beyond public markets, a family office investment strategy will likely look at diversifying a family’s investment portfolio. This is the standard through private equity, venture capital, hedge funds, and real estate-related purchases.
7. Direct Investments In Non-Traditional Asset Classes
To maximize profit, a family office may partially avoid traditional asset classes and invest directly in private corporations, start-up companies, and real estate. In turn, there is more control and potentially higher returns, and these investments can be leveraged for further opportunities.
8. Conducting Thorough Research To Judge Risk/Return
Risk is a risk. Portfolios that rely heavily on risky investing decisions stand to lose a lot. Furthermore, you may lack liquidity, higher volatility, and complex investing dynamics in non-traditional asset classes. A family office must conduct careful research, assess risk-return, and advise the client of strategies that could work and the risks present.
9. Considering Environmental, Social, And Governance Factors
Some high-net-worth clients emphasize sustainable investing. Family offices are encouraged to make investment decisions based on factors relating to the environment, social consequences, and internal governance.
10. Comprehensive, Transparent Investment Reports
Provide detailed insights into portfolio composition, investment decisions, and performance results in routine reporting. KPIs, risk metrics, and benchmarks should be included. This allows families to track progress and maintain awareness of what’s happening with their wealth being put into the investment space.
11. Capitalizing On Short-Term Market Volatility
The short-term market volatility that does not work in a family’s favour can be tolerated until the trend changes. Alternatively, if there are opportunities in market volatility to invest in select areas and see those investments climb as things regulate once more, a family office may feel obligated to take the chance.
12. Monitoring Whether It’s Time To Alter An Investment Strategy
A family office may be occasionally required to change investment strategies. This can occur due to new investment objectives or risk parameters being set, changes in market conditions, shifts in a family’s financial situation, or benchmarks of an existing strategy not being hit.
13. Including Philanthropic Initiatives In The Investment Strategy
Family offices are frequently assigned to make a positive social impact with family wealth and to pursue philanthropic endeavours. Incorporate this into your investment strategy, such as allocating funds for charitable causes to be given out regularly under the individual client’s or family’s approval.
14. Define A Long-Term View On Measuring Success
At any moment, checking in on a strategy may reveal it is not performing well. Defining how success will be measured and when it’s to be done is key. You may want to measure in long-term increments instead of checking in every month to see where matters stand. A market downturn and similar conditions ultimately are only temporary by design. Market stress can be ridden out.
