Payoff investing is an investing concept centered on individual and family investing choices. Its emphasisis less about the instruments or asset classes utilized in personal portfolios but on the eventual outcomes of these portfolios. Little emphasis is placed on names or instrument types because individual portfolio cashflows can be structured to deliver outcomes with clear preferences, loss criteria and expected wins.
Its main objective is to ensure that individuals maximise their lifetime wealth opportunities through a meaningful allocation of limited available resources. Put differently, maximising one’s lifetime investment payoff function. At the point of investing, individuals are clear about the various outcomes that can emerge from holding an instrument, a stock or bond and its potential impact on their wealth growing opportunities.
Research continues to show that when faced with conditions of uncertainty in the decision-making process, individuals are not expected utility maximisers. Investors will react to information, returns, changes and risk in ways suited to their understanding of the World using the rules of thumb available to them. As a result, investing decisions and portfolios must conform to the understanding of the holders of the portfolio and their expectations over the course of their lives. This approach helps prevent destructive patterns like closing out an investment when faced with a temporary drawdown or decline in returns. Its origins are in the behavioural sciences and game theory.
Traditionally, individuals are encouraged to worry about specific instruments; stocks, bonds, commodities, and currencies, drilling down to granular levels. There are hundreds of thousands of listed companies in different industries, in different countries, with different strategies. It is difficult to see why individual and retail investors fall into the trap of restricting their lifetime opportunities by following difficult to implement ideas. Some market participants also actively encourage investors to maximise their sharpe ratios. Sharpe ratios are very useful and great when managing resources for endowment funds but fall short for individuals who have a very different profile and behaviours. Choosing and finding skilled investment managers is adifficult task and tends to deliver below simple market index returns over an extended period. Strategies that may work for a decade may fail in the successive decade.
Its main objective is to ensure that individuals maximise their lifetime wealth opportunities through a meaningful allocation of limited available resources. Put differently, maximising one’s lifetime investment payoff function. At the point of investing, individuals are clear about the various outcomes that can emerge from holding an instrument, a stock or bond and its potential impact on their wealth growing opportunities.
Research continues to show that when faced with conditions of uncertainty in the decision-making process, individuals are not expected utility maximisers. Investors will react to information, returns, changes and risk in ways suited to their understanding of the World using the rules of thumb available to them. As a result, investing decisions and portfolios must conform to the understanding of the holders of the portfolio and their expectations over the course of their lives. This approach helps prevent destructive patterns like closing out an investment when faced with a temporary drawdown or decline in returns. Its origins are in the behavioural sciences and game theory.
Traditionally, individuals are encouraged to worry about specific instruments; stocks, bonds, commodities, and currencies, drilling down to granular levels. There are hundreds of thousands of listed companies in different industries, in different countries, with different strategies. It is difficult to see why individual and retail investors fall into the trap of restricting their lifetime opportunities by following difficult to implement ideas. Some market participants also actively encourage investors to maximise their sharpe ratios. Sharpe ratios are very useful and great when managing resources for endowment funds but fall short for individuals who have a very different profile and behaviours. Choosing and finding skilled investment managers is adifficult task and tends to deliver below simple market index returns over an extended period. Strategies that may work for a decade may fail in the successive decade.