- Clear communication is crucial in investment management to ensure that all parties understand the desired returns and risks involved.
- The language of investing can be complex and opaque, making effective communication challenging.
- Establishing clear investment objectives is essential in determining the appropriate investment strategy.
- Objectives should be continuously reviewed and adjusted as investment results and circumstances change.
- Investment return objectives should consider factors such as funding needs, inflation, and investment management fees.
- The balancing act between maximizing returns and managing risk is a key consideration in defining investment objectives.
- Clear communication of risk concepts is vital in connecting objectives to portfolio construction.
- The next installment in the series will explore the challenges of traditional investment decision frameworks and risk concepts.
The Importance of Clear Communication Regarding Investment Objectives and Risks
Effective investment management requires clear communications. Everyone involved must understand the returns they are seeking and the risks they are shouldering. But the amorphous quality of some crucial investment concepts, particularly investment risk, often makes these communications hard to achieve.
The Setting
In any sizable institution, collaboration is necessary in the investment process. However, communication in the investment world can be challenging due to the complexity of the language used. Participants may believe they understand and are understood when that’s not the case, leading to significant decision-making problems.
From Purpose to Investment Objectives
The purpose of a sizable investment pool may seem clear, but specific objectives are necessary to determine the investment strategy to support that purpose. Deciding which objectives to pursue involves difficult conversations and the investment vocabulary can sometimes obscure or limit options. Regularly revisiting objectives is crucial as circumstances change over time.
Setting Investment Objectives
Setting investment objectives over continuous “investment planning horizons” is a practical approach. These objectives can be short-term or long-term and should be updated annually. Each investment organization has varying degrees of discretion and precision in setting its target-return objectives. Maximizing returns may seem reasonable, but it comes with substantial risk, which can hinder an organization’s ability to achieve its goals.
The Challenges of Risk Communication
Risk is a challenging concept to define and gauge. Identifying investment objectives and achieving stakeholder buy-in is the critical first step in connecting objectives to portfolio construction. Overcoming communication challenges related to risk and other investment concepts is crucial.
The next installment in this series will explore the challenges of traditional investment decision frameworks and risk concepts.
