How Should a Family Compare Investments With Different Risk Levels and Time Horizons?

Compare each investment with the family obligation and time horizon it is intended to serve. An investment with a long lockup and uncertain exit may suit a distant objective but may not fit near-term spending. The family's cash needs, tolerance for loss, and ability to wait affect the comparison.

Sort Needs by When Capital Is Needed

List the family's short-term, intermediate-term, and long-term liabilities. These may include ongoing spending, planned commitments, or future goals. Estimate when funds may be required and how certain each need is. First understand what the portfolio must support, then compare investments by projected returns.

Match liquidity to the timing of those needs. Capital reserved for near-term obligations generally needs to be accessible. Funds with a longer horizon may accept less liquidity if the family has other resources to cover spending and commitments. Review capital calls and other obligations alongside the stated investment horizon.

Compare Risk With the Family's Capacity

Assess potential losses, changes in value, concentration, and debt. Also consider whether the family might need to sell at a difficult time. Consider scenarios that could affect the investment or the wider portfolio. Expected return is one part of the comparison. A higher projected return may come with greater volatility, illiquidity, or a greater chance of permanent loss.

Consider each investment's role in the whole portfolio. Two investments can have similar return expectations but behave differently under stress or create different demands for cash. The family's objectives and values, along with its time horizons, can change. Review whether each investment's original role still fits when circumstances shift.

Use a Consistent Comparison

Set clear assumptions for return and fees, then assess liquidity and risk over a suitable horizon. Avoid comparing a short-term liquid strategy with a long-term private investment using only one annualized return figure. Include the timing of cash flows and explain valuation assumptions, especially when a private holding has no frequent market price.

Record why each investment was selected and which family need it supports. This makes it easier to review performance later without judging every holding by the same standard. A short-term allocation may succeed by providing liquidity and stability, even if its return profile differs from that of a long-term growth investment.

Review the Match Over Time

Revisit the comparison when spending plans or commitments change, or when the family's willingness to accept risk shifts. If an investment's horizon no longer matches the obligation, evaluate the mismatch before making a decision. The family's committee and staff should agree on who monitors liquidity and risk, and who tracks changes to the original thesis.

For a practical framework, map portfolio models to the family's objectives, and review liquidity across investment horizons. Consider liquidity and potential return, assess expected return against permanent-loss risk, and plan for capital calls and liquidity.

Deciding which risk profile is acceptable to the family will drive all other decisions.

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