How Can a Family Set a Return Target That Matches Its Real Needs?

Set a return target by starting with the family's needs and the purpose of each pool of capital. A target chosen without considering spending, obligations, or time horizon can encourage risk that does not fit the family. Begin with a clear statement of what the wealth is meant to support.

Map the Family's Requirements

List expected spending and taxes. Add planned commitments and goals tied to future generations. Separate capital intended to provide current income from capital intended for long-term growth or preservation. Families may also have operating businesses or real estate, along with other assets that affect income and risk. The target should reflect the whole balance sheet, including liquid investment accounts.

Ask what the portfolio must deliver after inflation and costs to support those requirements, and account for taxes in the calculation. Use a range of assumptions instead of treating a single forecast as certain. If the target appears high, examine whether the family can change the timing or scale of its goals, and whether the portfolio has room to take that risk. The guide to inflation assumptions and the guide to purchasing power can help with this work.

Match Return Expectations to Risk

A return objective is not a promise. The family should consider possible losses and periods without liquidity. It should also consider the chance that an investment takes longer than expected to produce income or value. In The Single Family Office, I describe capital preservation through seeking returns while managing risk carefully. That principle asks the family to assess how a target might be reached and whether the number looks attractive.

Compare the target with the family's capacity to bear a loss and its willingness to accept one. These are different questions. A family may have a long horizon but still need liquidity for a business, taxes, or spending. Build room for those needs into the plan. The guide to estimating risk capacity can help clarify the family's constraints.

Make the Target Useful in Decisions

Use the return target to evaluate the portfolio and investment proposals. Review liquidity and concentration, along with the risk of permanent loss. The family may need different expectations for different pools of capital. Document the assumptions and explain who can approve changes. This gives the family and its investment team a common basis for review.

Revisit the target when spending, family priorities, or ownership changes. A business sale, inheritance, or other liquidity event can alter what the portfolio needs to provide. If tax treatment or entity structure affects the calculations, talk with your CPA or attorney. The multi-generational wealth projection can help explore long-term assumptions, and the family compass guide can help connect investment objectives to shared priorities.

Capital preservation through investing in outsized returns for moderate risk.

Sources: The Single Family Office. Informational only, not financial, legal or tax advice.