With the age of generous final salary pensions slowly coming to an end, and the sustained period of rock-bottom interest rates we are currently in, it is more important than ever that people are given investment options with clearly-defined outcomes to help them prepare for the future.
One of the biggest issues faced by people trying to invest for later life is a lack of understanding when it comes to how much money they need to achieve a certain standard of living - and how they are going to get there.
This problem is exacerbated by the use of arbitrary, and often short-term performance measures.
The investment manager of a fund may be very skilled and do a good job against a certain benchmark, but the problem for investors is that the benchmark’s returns do not speak to their needs.
To address this, investment strategies must be built on targets that people understand and can relate to their own life.
The traditional model of investment management has remained largely unchanged for decades.
Typically, fund managers work to generate returns by focusing on market benchmarks or comparisons with peer groups as a way to validate the effectiveness of their performance.
However, the economic and political upheaval we have experienced in the last couple of years has made the markets far more volatile, creating a bumpy, nervy ride for investors. Conventional investment strategies often fail to prioritise the needs and goals of investors.
With this is in mind, we should arguably be moving towards strategies which manage volatility and soothe nerves by taking a longer-term approach with less undue risk. These investment approaches should also focus primarily on achieving specific outcomes that align with people’s life goals.
Arguably, what most investors seek is something that lies neatly between traditional market investing and the guaranteed returns experience provided by something like a pension annuity. Outcomes-based investing bears some of the hallmarks of both approaches.
For example, the performance outcome targeted is a return in excess of inflation through the cycle.
Additionally, it focuses on making the journey to the outcome as palatable as possible.
This provides a number of benefits such as reducing sequencing risk (the impact of poor performance on wealth, especially when the assets are at their largest) and perhaps more pertinently, the smoother the journey to the outcome, the greater confidence felt by investors - which helps them to stay the distance to achieve their necessary investment goal.
With a large amount of uncertainty out there at the moment and a cacophony of background noise, it is important that investors' journeys are made comfortable in order to help them stay invested until they reach their desired investment outcome.
Clearly no investment strategy is immune from market forces but intelligent asset allocation with plenty risk diversification, that has a good probability of achieving the investor return goals, should help.
Time horizons are very important when it comes to both portfolio risks and returns.
