Wells Fargo Private Bank
Regional Chief Investment Officers

John Lynch, Mid-Atlantic
David Roda, CFA, Southeast
Cam Hinds, CFA, Great Lakes
Marc Doss, CFA, California
Michael Serio, CFA, Mt. Northwest
Sean McCarthy, CFA, Southwest
Kei Sasaki, CFA, Northeast 

In this Monthly Market Advisor:

  • Wells Fargo Private Bank employs a goals-based investment discipline in client portfolios, implementing it through a thorough interactive discovery review resembling what we consider to be a financial "physical" exam.
  • We believe that such a thorough review is important because it helps to ensure that investment portfolios are aligned to realistic goals and financial realities.
  • This goals-based review process should be ongoing as market conditions and client circumstances change over time.
  • We find that with such a plan in place, investors are less likely to make emotional decisions during times of market volatility.

Download the report (PDF)

For managing client portfolios, Wells Fargo Private Bank employs a goals-based investment discipline built upon an interactive discovery review resembling what we consider to be a financial "physical" exam. This discovery review starts with a thorough examination of assets, liabilities, expenses, and income streams to establish a basis from which to build a comprehensive wealth plan. It also encompasses a forward-looking analysis in which the individual investor or family defines and prioritizes a list of crucial lifestyle, business, and personal financial goals. Whether it's saving to leave assets to loved ones, transitioning a business, giving to a charity, reducing tax payments, or simply helping ensure an income stream into retirement, this hierarchy of goals is used as the basis to determine an investment program to help meet the client's complex financial needs over time.

Some high net worth investors have multiple financial goals that can be efficiently accommodated within a single investment portfolio. But in many cases, assets need to be segregated into different accounts or legal ownership vehicles to help optimize the investment design or tax efficiency or address beneficial owner requirements. There are also cases in which the client's goals may not be achievable within a framework of reasonable investment expectations. In these cases, we recommend the client consider revising his or her expectations to align them with the degree of risk that they are willing to accept to help reach their goals. In our view, the interactive discovery review is a highly effective means to help ensure that investment portfolios are customized to client goals and that the goals appear achievable given their financial realities.

History clearly demonstrates that market timing has been a loser's game as shown in chart 1. Humans are hardwired with the fight-or-flight gene. Fear and greed are emotional derivatives of this trait that often have undermined investor results. By defining a clear set of goals and understanding the investment program needed to help achieve those goals, the investor may be less likely to abandon the plan during market downturns or take on too much risk when markets are moving up sharply. Investment decisions and performance review discussions center around keeping the portfolio on track toward those goals over time instead of fixating on how the portfolio performed relative to a market benchmark. This regular checkup process helps keep the advisor updated on the client's vital financial factors and ensure that the client fully understands how the investments within the portfolio help contribute toward his or her objectives. Our experience strongly suggests that an investor with a detailed, updated wealth plan is much more likely to remain committed to his or her investment program over time and, therefore, is more likely to achieve financial success in the long run.

Chart 1. Market Timing May Lead to Missing Out on Higher Returns

Chart comparison of missed days of investing in the S&P 500 index and rate of return. Contact your Relationship Manager for more information.

Source: Wells Fargo Investment Institute; Morningstar Direct as of 1/1/2016. For illustrative purposes only. Does not represent the performance of any investment. Past performance is no guarantee of future results. An index is unmanaged and not available for direct investment.

In the absence of major life events, an investor's goals tend to remain fairly stable or to shift gradually over time. However, economies and markets are constantly in a state of flux. Opportunities and risks across asset classes can rapidly shift based on changing economic variables, policy moves, valuations, and a host of other catalysts. Therefore, keeping the portfolio calibrated to long-term return and risk targets typically requires a dynamic investment process involving robust analysis and forecasting, thematic and tactical investment overlays, and a highly disciplined diversification and risk management methodology. In our opinion, "set it and forget it" strategies cannot fully compensate for changing market factors.

The current economic and investment landscape presents very interesting opportunities and challenges for investors that illustrate our argument for active management over a more passive approach to managing a goals-based portfolio. The U.S. economy appears poised to enter into a new phase in which tighter employment conditions and expectations of modestly rising inflation may prompt the Federal Reserve (the Fed) to gradually increase short-term interest rates in coming quarters. Continued improvement in consumer and construction spending should more than offset the mild economic drag associated with gradually tightening Fed monetary policy.

Wells Fargo Investment Institute (WFII) recommends an overweight position to the Industrial sector based on gradual improvements in capital spending on plant and equipment as rising wage costs prompt companies to seek production efficiency gains. The U.S. economy will likely grow by 2.1 percent in 2017 with the rate of inflation ticking up to 2.1 percent. Very anemic growth and inflation trends in the developed international economies should keep central banks in easing mode and hold interest rates to extremely low levels (even negative in select countries). Likewise, emerging market governments will likely focus targeted fiscal and monetary stimulus policies aimed at combatting declining growth trends. Overall global economic growth should improve only nominally in 2017 to a tepid 3.2 percent pace.

WFII's forecast for slow growth accompanied by gradually rising inflation may lead to modest results for the global capital markets in 2017. Although WFII's outlook remains constructive for U.S. stocks, it believes that price-to-earnings (P/E) multiples are fairly valued at current levels, with the S&P 500 Index trading at over 17 times WFII's 2017 earnings forecast of $127. In the absence of rising valuations to help lift stock prices, equity returns will likely be driven primarily by earnings growth. This would imply a roughly 6 to 8 percent return for the S&P 500 Index between now and the end of 2017 based on WFII's earnings estimates and assuming stable P/E levels. In this environment, WFII would expect volatility to increase as the market rewards positive earnings surprises but has a less favorable reaction to companies that miss their forecasts.

Unlike the last few years in which it was more important to be in the rising markets than to pick the best stocks, WFII believes that active management and superior equity selection will likely have a larger impact on returns going forward. Additionally, as the economic cycle matures and interest rates are expected to begin to rise from current low levels, it favors U.S. large-capitalization companies with strong balance sheets within cyclical growth sectors such as Consumer Discretionary, Industrials, and Technology. Nonetheless, WFII recommends a high level of global diversification within and across markets to potentially mitigate concentration risk and take advantage of valuation differences across markets.

Contrary to trends during past economic cycles, bond yields have generally declined as the current recovery has progressed. As a result, recommended fixed income allocations have become more focused on domestic high-quality corporate and municipal issuers with strong balance sheets and ample cash flows, and the recommended exposure to long-maturity bonds has been reduced. Nonetheless, despite the uneven risk/reward characteristics, WFII has not abandoned bonds as a core allocation within portfolios. Bonds can play a very important role as a diversifier, typically rising in value when negative sentiment drives equity markets lower. Despite the low-yield environment, high-quality shorter- and intermediate-duration bonds should more than offset inflation. An investor who chooses to hold cash, at a yield approaching 0 percent, in lieu of bonds should realize this will likely result in negative real rates of return.


Goals-based investing can help ensure that a client's holistic financial situation, goals, and expectations are all addressed in the formulation of the portfolio investment strategy. Although an investor's long-term return targets, risk tolerances, and goals may remain constant, market environments are subject to change. As a result, the portfolio may benefit from active management to help keep it inside the proverbial return/risk rails. Strategies that work best in one environment may produce unsatisfactory results in other scenarios. Decisions such as the following often are important determinants of portfolio risk and return over time and can contribute greatly toward a successful investment outcome:

  • Using active managers vs. index strategies
  • Purchasing individual securities vs. implementing fund-based strategies
  • Employing tactical overweight or underweight allocations
  • Implementing risk-management strategies, such as hedging and systematic rebalancing

On the other hand, in our view, using emotional judgments and attempting to the time markets tend to have a low success ratio.