By Daniel Archibald | CFA
In 1974, farmers in central China were in the process of digging water wells, when they stumbled upon a clay figure. This led to the uncovering of the famous terracotta army, consisting of around 9000 warriors, horses and chariots, all guarding the tomb of the first emperor of unified China. The artefacts had survived, buried for over 2000 years. The size of the emperor's tomb was amazing in its own right, but one of the more peculiar aspects of the ritualistic artwork is that each of the 8000 plus warriors bares a different face. Though there are many similarities between face shapes and expressions, it is believed that no two warriors are the same.
Similarly, no two investors are the same - though there are many similarities regarding goals and situation, each investor strikes their own unique pose. And as with the artisans that worked to provide their emperor with a suitable resting place, so too do today's investors require skilled and dedicated investment management.
This personalisation in building portfolios is influenced by a number of key factors, including:
- Risk tolerance - Each investor's experience with life and investing is different. This will lead them to have differing levels of aversion towards risk-taking activities such as investing.
- Need for income/cash - Investors can have differing needs for liquidity from their investment portfolios. Whilst most superannuation portfolios are effectively locked away until retirement, portfolios for those in their later years may require access to cash to meet everyday living expenses as well as ad hoc spending needs.
- Investment timeframe - Each investor will likely have different timeframes and investment milestones to consider. Younger investors may be looking for short-term portfolios to save for a home deposit, whereas older investors may be looking toward a somewhat distant retirement.
- Tax considerations - Each investor comes with different tax characteristics. These can differ due to such things as account type (super, pension, non-super), unrealised capital gains, wage level (i.e. tax bracket) and family situation (i.e. family tax benefits).
- Regulatory considerations - There are also likely to be a range of different regulatory parameters in which investors need to abide. For example, an investor with a superannuation portfolio is legally restricted from investing in certain types of assets (e.g. home rented to a close associate).
- Investor preferences - Each investor's life experiences may also lead them to have preferences or aversions towards specific assets. Some may not want to invest in high-polluting industries, whereas others may want to avoid emerging market investments.
- 'Human capital' constraints - Each investor's background will also be different, and this can also add a layer of assets to avoid. For example, an investor who is employed as a fly-in, fly-out mining contractor might want to avoid investing in mining stocks. This creates diversification between the investor's human capital (work) and their financial capital (investments) so that if there is a mining industry downturn the investor won't be hit on both fronts.
There are likely to be many more ways in which an investor's portfolio might be personalised. For example, investor behaviours and biases might also be considered as part of constructing a portfolio in which the end investor is comfortable. Of course, the only real way to truly understand each investor's needs and goals is through patient and long-term building of trusting relationships with investment advisors and managers.