Assessing the Suitability of the Tangency Portfolio in Goals-Based Investing: A Case Study Analysis

This dissertation aims to ascertain whether, within the context of goals-based investing, the investor should always choose the tangency portfolio. To answer the research question, this thesis presents a case study of a family that has three distinct financial goals. In the pursuit of these goals, the goals-based investing strategy is employed, resulting in the formulation of a unique strategy for each goal. Within this framework, multiple portfolios, including the tangency portfolio, are analyzed to determine if they comply with the admissibility criteria (the ability to achieve the predefined financial goal), and the criteria for sound investments. Subsequently, the most suitable portfolio is ascertained by following the investors’ preferences which are structured hierarchically. The results show that the tangency portfolio does not universally emerge as the most fitting choice across all three financial goals. In the first scenario, it falls short of satisfying the required criteria to meet the goal. In the second one, it proves to be an unsound investment option. Finally, in the context of the third goal, the tangency portfolio is outshined by an alternative portfolio that better aligns with the investor’s preferences. This research is important because it challenges the assumption that the tangency portfolio, which maximizes risk-adjusted returns (when risk encompasses both upward and downward fluctuations), is always the best fit towards achieving goals. By conducting a case study, this dissertation highlights the importance of carefully choosing the portfolio that best fits investors and their specific financial goals, providing valuable insights for investors and financial advisors.