If the cushion is positive for the CPPI, higher risk tolerance client should select CPPI strategy.
With the high tolerance, can they select BH and CM as well? Or they should just focus on CPPI to get the most return?
For an average or lower risk tolerance clients, should they just skip CPPI and use BH or CM strategies directly?
Thank you!
Well each rebalancing strategy has it’s own pros and cons (like everything seems to do in L3, haha). Which one you select should be based primarily on the client’s risk tolerance (willingness and ability, whichever happens to be lower), the clients overall objectives, and the conditions of the market (non-trending or trending). A high risk tolerance client (based on an objective - rational economic man assessment) could indeed select BH and CM if they indicated that this was their preference (willingness). As for lower risk tolerance clients, I would agree with your assessment. To give you a real life example: I have clients who indeed have a high willingness, as well as ability to take risk (mostly the adventurer, entrepreneur types), but their required rate of return is quite low (based on their projected retirement and legacy needs - determined via goals based planning). So the discussion moves from an initial client initiated demand of “I want a 10% annual rate of return!” (which is rather aggressive and arbitrary, why 10%?), to a discussion framed as: do we need to be as aggressive as you suggest Mr. client? why don’t we take a more conservative wealth preserving approach that still meets and slightly exceeds your goals? Real life is complicated… managing client expectations and emotional biases is truly the trickiest part of individual wealth management.
This is great to know! Thanks for the help!
I have the chance to become a PM but I chose another job because English is not my first language. Still think Portoflio Manager is an interesting job though!