Ashvin B. Chhabra: Understanding Goals Is the Value Proposition

The CFA Institute Seminar for Global Investors, formerly known as the Financial Analysts Seminar, offers engaging lectures, small classroom discussions, and interactive case studies on a wide range of timely investment topics. The 2019 seminar will be held in Chicago on 22–25 July. Learn more about the agenda and speaker details on our website.

“As an investor, how do you define success?” asks Ashvin B. Chhabra, formerly the managing director, chief investment officer, and head of investment management and guidance at Merrill Lynch Wealth Management. Is your answer “beating the market”?

“Changes in the structure of pension plans, life expectancy, and the globalization of financial markets have increasingly thrust upon individuals greater responsibility for their financial future,” Chhabra says. “The ability to invest appropriately to meet their individual requirements will be the single most important determinant of their ability to maintain their current standard of living during their retirement years and of financial success.”

This statement is the premise behind his Wealth Allocation Framework (WAF), further detailed in his book, The Aspirational Investor — Taming the Markets to Achieve Your Life’s Goals, and in his presentation at the 60th Annual Financial Analysts Seminar.

Chhabra’s framework is more about understanding one’s goals in life, and setting strategies to meet them, than it is about “beating the market,” the traditional definition of financial success. Chhabra finds that investors rarely beat the market. Why is this? Because individual investors are their own worst enemies. On average, they give up almost two thirds of their returns, due to their inability to keep their emotions in check when buying or selling.

Accordingly, Chhabra’s approach to investing “goes beyond modern portfolio theory by shifting investment strategy from a focus on the securities held in your portfolio to a consideration of your personal objectives” — for example, saving for college, retirement, or to start a business.

Similar to the framework of Jean L.P. Brunel , CFA — explored by my colleague, Lauren Foster — Chhabra states that advisers should start with investor goals, not market returns, by asking three broad questions:

• What do you need for immediate safety?
• What do you need to be comfortable?
• What do you aspire to?

From there, the adviser creates three different portfolios: a safety portfolio, a market portfolio, and an aspiration portfolio, each one requiring very different construction.

How are resources allocated to these assorted portfolios? The answer relies on the concept of risk allocation. “For those things you must do, the emphasis is going to be on lowering the risk of your not achieving these goals,” Chhabra says. “The goals you aspire to may require a somewhat higher level of risk.”

In addition, Chhabra emphasizes that it isn’t only your investments that matter, it is also your human alpha: your earning potential and expertise in your work. He notes that “while market investments are crucial, a comprehensive goals-based approach that takes into account all of your assets and liabilities, including your human capital, and connects them with their underlying goal or purpose will create a more complete investment process.”

Chhabra cautions that diversification will not be enough to guarantee safety or to create wealth. It is important, but investors must go deeper than just diversifying. “Markets are unpredictable,” he argues, “and even broadly diversified portfolios can experience extreme volatility.” Further, asset allocation and portfolio construction are just aspects of the purpose of money and achieving goals in an uncertain world. The value proposition lies in understanding the desired goals, and then helping investors achieve them, no matter what happens in the markets.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

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