A reader asks:
I am 60, retired and have a substantial portfolio ($14M not to brag) invested in index funds 60/40 at the moment. I have enough money to live off from defined benefit pensions for the rest of my life, but I keep swinging from one view to another depending who I read. Some famous passive advisors say don’t take any risk unless you have to while others say you should be invested all in stocks because you don’t need the money anytime soon and should be leaving a legacy. Depending on how I feel and what the market is doing I target somewhere between a 50/50 portfolio and a 75/25. How do I square this circle?
That’s a lot of money.
Not only does this person have a substantial portfolio, but they have a pension plan with enough income to live off. That’s an enviable position.
Your asset allocation should always take into account your risk profile and time horizon. The problem is the factors that help determine your risk profile are often in competition with one another.
I always like to look at it through the lens of your willingness, need and ability to take risk.1 Here’s a quick definition for each:
Need: The return required to reach your financial goals.
Ability: Your financial circumstances — time horizon, income, portfolio size, liquidity needs, spending habits, etc.
Willingness: The balance between your desire to grow your portfolio and your desire to sleep at night.
If you have a large enough portfolio, there is a good chance you don’t need to take a lot of risk. You’ve already won the game, so why continue playing it?
But you also have the ability to take more risk because you have a bigger cushion if things go haywire for a bit.
Willingness to take risk becomes the emotional fulcrum of your investment plan when you have the ability but not the need to take more risk.
The true answer to this question would require a comprehensive financial plan that considers various time horizons for specific goals, estate plans, tax considerations, charitable giving, and future plans.
I know plenty of wealth managers who subscribe to the idea that you should stop playing once you’ve won the game by downshifting into a more conservative portfolio.
I also know plenty of advisors who are more willing to look at multiple time horizons within an investment plan to invest part of the portfolio for the next generation.
There is obviously some middle ground between keeping your portfolio in T-bills and investing it all in the stock market.
The good news is there isn’t a right or wrong answer for a question like this. If you go 50/50 or 60/40 or 75/25, it’s probably not going to matter all that much. You have $14 million and a pension.
You’re going to be fine either way.
The most important aspect of this decision is not necessarily the asset allocation itself.2 The most important aspect of this decision is your ability to stick with your chosen allocation through thick and thin.
You don’t want to get into a situation where you’re constantly worried about a minor allocation difference in your portfolio that causes you to constantly tinker. That not only introduces tax consequences but also opens you up to behavioral mistakes from market timing.
Investing is an endeavor where you’re forced to make estimates and set expectations with imperfect information about the future. That means you need a reasonable decision-making process that leaves you comfortable with your choices, regardless of the outcome.
Winning the game isn’t just about creating the biggest nest egg you can. That certainly helps.
But the real wins come from being comfortable with your situation, not over-obsessing about your investments, creating a reasonable investment plan and then getting on with your life.
Choose an allocation that balances your future regrets and desires and stick with it.
Perfect is the enemy of good in decisions like this.
Josh Brown joined me on Ask the Compound this week to answer this question:
We also discussed questions about our personal investment decisions, switching your portfolio from individual stocks to index funds, the potential impact of artificial general intelligence and investment advice for a college senior.
Further Reading:
If You’re Still Worried You Aren’t Wealthy
1That CFA designation still comes in handy from time to time.
2Assuming you put some thought into that allocation and it matches your risk profile and time horizon.
