Investing and allocating capital
How Can a Family Tell Whether an Investment Strategy Is Working?
Short answer. Judge a strategy against the purpose, risk limits, and time horizon agreed before capital was committed. Review net performance and cash flows, then consider concentration, liquidity, and whether the original thesis has changed. A strategy can trail its benchmark for a period and still be on plan, but persistent gaps or broken assumptions call for review.
Judge an investment strategy by comparing its results and risks with the purpose the family agreed to pursue. A return number on its own is not enough. Check whether the strategy is behaving as expected, still fits the family's needs, and rests on reasons for allocating capital that remain valid.
Set the Standard Before Investing
Write down the objective, expected holding period, relevant benchmark, risk limits, and conditions that would prompt reassessment. For strategies that are hard to compare with a public index, define practical measures tied to the investment, such as cash flows, operating progress, and liquidity. Record the assumptions behind its valuation as well. A clear portfolio model connects those measures to the family's broader allocation.
Make sure the family understands the range of possible outcomes. In my experience, setting expectations before a downturn helps families avoid treating ordinary volatility as proof that a strategy has failed. The investment committee process gives the family a regular place to review performance and risk, and to consider changes to the thesis.
Review Results and Risk Together
Look at performance after fees and compare it with the chosen benchmark over a period that fits the strategy. Review cash flows and capital calls, then consider liquidity, concentration, and borrowing alongside returns. For private holdings, reported values may change less often than public market prices, so examine underlying business or asset developments instead of relying on the smoothness of reported returns.
Separate market effects from the manager's or investment team's decisions where the available information allows. Ask whether results came from the intended sources of return, whether costs matched expectations, and whether another use of the capital would have better served the family. The market return and investment decision comparison can help structure that analysis.
Decide Whether the Thesis Still Holds
Use a scheduled review to check for persistent shortfalls and unexpected risk. Also check for staff or process changes and material departures from the original plan. One difficult period does not automatically mean a strategy has failed. Repeated misses, unclear reporting, or an investment thesis that no longer fits the family's needs deserve closer review.
Document the evidence and the decision, including whether to continue, change the allocation, or seek further information. Keep the review disciplined so that the family does not shift strategy solely in response to short-term market moves. The process for avoiding short-term changes can help support that discipline.
Sources: The Family Office Book, The Single Family Office. Informational only, not financial, legal or tax advice.