Designing an Investment Portfolio with Purpose

Over the past few months, we've spent a lot of time thinking about how we can make our investment conversations even more personal and tangible. One thing we've realized is that most discussions about investment risk jump almost immediately to percentages and hypothetical market declines.

As we've continued to refine our planning process, one question keeps rising to the top because it helps connect investing to real life:

If the stock market experienced a significant decline, what spending would you want to have already planned for?

For years, we've talked about having a certain percentage invested in stocks and bonds. But a 70% stocks / 30% bonds portfolio can mean very different things for:

• A 40-year-old business owner who may not need portfolio withdrawals for many years.
• A 65-year-old retiree who depends on the portfolio to help fund retirement.
• An 80-year-old widow whose essential expenses may already be covered by guaranteed income.

Asset allocation is important, but percentages don't tell you why you own each asset. Two families may have identical portfolios, yet the purpose behind those portfolios can be completely different.

Lately, I've been wondering if there's a simpler way to think about investment risk. While we've always built portfolios around our clients' goals, framing the conversation around the spending we'd like to thoughtfully plan for feels more intuitive to me.

Every dollar has a purpose.

Some dollars may be needed to cover next year's living expenses. Others may be earmarked for education, a future vehicle purchase, a special trip, or another goal that's only a few years away.

Other dollars may not be needed for decades. Those dollars have a very different purpose.

For some families, the answer to that question may be setting aside only a year or two of anticipated spending. Others may feel more comfortable knowing several years of spending have been earmarked in investments that have historically been less volatile than stocks.

There isn't one right answer. The answer depends on your goals, your income sources, your flexibility, and what gives you confidence to remain invested through inevitable market declines.

Imagine a family with a $5 million investment portfolio that's spending approximately $200,000 per year. Rather than beginning with a discussion about whether they should be 60% or 70% invested in stocks, they first ask a different question: "How much of that spending would we like to have thoughtfully planned for if the stock market entered a prolonged downturn?" If they decide five years feels appropriate, they may earmark approximately $1 million for that purpose. Suddenly, the remaining $4 million has a much longer investment horizon than they may have initially realized.

Sometimes what people perceive as investment risk isn't really long-term investment risk at all. It's the concern that they'll need money during a market downturn. Once those near-term needs have been thoughtfully addressed, the remaining dollars often have a much longer time horizon than people initially realize. And that can change how they think about investing.

Rather than simply saying, "My portfolio is 70% stocks and 30% bonds," what if we instead said, "We've thoughtfully planned for the next several years of anticipated spending." Once those near-term needs have been addressed, it often becomes easier to invest the remainder of the portfolio with the patience that long-term investing requires.

For some families, this way of thinking may not change the portfolio at all. For others, it may simply reveal that they have more flexibility in how they invest their long-term dollars than they previously realized. Either outcome is perfectly fine. The goal isn't to arrive at a predetermined allocation. It's to build a portfolio that's aligned with the purpose of each dollar.

Whether or not it ultimately changes the portfolio itself, I believe it can lead to a more meaningful conversation about investment risk… and why we own what we own in the first place.

Perhaps that's a better place to begin.

Not with percentages.

Not with hypothetical declines.

But with purpose.

When we first identify what near-term spending we'd like to thoughtfully plan for, conversations about stocks, bonds, and risk often become much easier. The portfolio isn't simply built around percentages. It's built around the purpose each dollar is meant to serve.

Journey Beyond Wealth (“JBW”) is an Investment Advisor registered with the SEC. All views, expressions, and opinions included in this communication are subject to change. Registration of an investment advisor does not imply a certain level of skill or training. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Past performance does not guarantee future performance. Future returns may be lower or higher. Investments involve risk. Investment values will fluctuate with market conditions, and security positions, when sold, may be worth less or more than their original cost. Please contact us if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions.