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Knowing that you have enough wealth. Staying in the game instead of taking excessive risks.

There is a difference between a plan to  building up your wealth and there is another plan to staying wealthy. The key is to know how much is enough.

If you have $50k trying to build up to $500k to be ready for retirement or financial independence,  you tend to take more risks because you have a longer time horizon. You are probably 25 years old thinking  of having wealth to be independent at 50 years old. That’s 25 years old.

You could probably have a 70% equity versus 30% bond allocation. Stocks tend to be very volatile in that at certain points, the equity portion can go down 40-70%. That may be ok (if you have the stomach to take that!) if you are somewhere far from needing the wealth to provide cash flow for financial independence/retirement.

However, suppose you are at 48 years old.  A 70% equity allocation will cause your overall portfolio to take a severe dip. That is ok, if you are not dipping in to get cash flow for expenses.

However, if you draw it down its a double whammy your portfolio loses 30-40% AND  you cut it further by drawing down a percentage of the assets for your expenses. You have less assets to grow back to the previous size or even to an adequate size. This is known as sequence of return risk.

If you are high net worth

This situation gets more pronounced if you are rich with say 15 mil in assets. You can adequately cover your expenses and even more.

Yet, we tend to be very risk seeking in the way we deploy our capital. We always want to grow more.

As a retiree you can put up your full allocation in an ETF that mirrors the NASDAQ index, which are primarily tech and biotech companies. These are higher risk. Or you could put up your full allocation in Gold stocks or Gold ETF.

This portfolio is very speculative, and if you have a good crystal ball you will do ok.

However, if you don’t what happens when they move down 50% and you realize your withdrawal amount is going to take a chunk that will satisfy your expenses but will leave an even smaller asset size to continue to grow.

In both the rich and not so rich scenario, it gets worse if you realize you do not have the stomach for such volatility.

You sell out before the market can recover. This happens a lot.

A lower weightage to equity for preservation

When it comes to preserving wealth, it may make more sense to understand your risk tolerance.

Most of all, it may be more important to know that at 15 mil, you have enough. You do not need to take that exceptional risk.

Larry Swedoe sets up his portfolio with 70% bonds and 30% equity, with the equity deployed in USA small caps, international and emerging markets value. These have historically statistical evidence to outperform large cap by 3-4%.

Setting up this way ensures that even with the higher volatility, a 70% decline would still leave the overall portfolio down by 21%. A wise planner would be able to focus you on structuring a portfolio taking into consideration the behavioural tendency.

You still be able to sleep at night.

Sometimes the name of the game is not to beat your neighbour or the friends you are interacting with.

It is knowing how much you need, what is the way to get there and staying in that game. What is the point of chasing a huge return, when you might sell off at the bottom because you didn’t know its going to be that bad.

A good planner would have been able to explain and help you with stuff in this area, so its important to find one.


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Matthias Kauer

Monday 27th of October 2014

I listened to that exact "Masters in Business" podcast episode today and thought about doing a write-up myself. What a coincidence :)


Monday 27th of October 2014

Hi Matthias ,

Thanks for visiting. The podcast is one of the best in the series and there are many good things but this is the one that left the biggest impression. Cheers.

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