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Family Wealth Management: Seven Imperatives for Successful Investing in the New World Order by Tom McCullough, Mark Haynes Daniell

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Chapter 16

Rethinking the Role of Traditional Asset Classes

Before setting out to draft an investment policy statement (IPS), allocate assets on a strategic basis, or select specific assets for investment, it is important to establish the overall purpose of the family’s portfolio and to determine the role and financial purpose of each asset class within the overall portfolio: capital growth, wealth preservation, income generation, and diversification, among others. Over time, and in response to changes in the environment, the purpose of asset classes can evolve, thus creating an opportunity to rethink the role each plays in the overall portfolio.

Before allocating assets, and to provide a bit more background to the repurposing of assets in the current climate, the traditional role of each asset class is thus worth revisiting. Some observations on the asset classes and their role in different portfolios may help to guide investors in defining and implementing a family investment plan.

Cash and Fixed Income

Cash and fixed income typically play three roles in an investment portfolio: capital preservation, liquidity, and income.

Capital Preservation

These are typically the safest assets in a portfolio since the borrower is expected to repay the principal value of these assets in a specified time period. Often, the borrower is of a very high quality such as reliable governments and their agencies or high-quality corporations and can usually be relied upon to pay back the principal borrowed. ...

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