Blog post #402
How much is enough?
How much money do you need, to have “enough”?
How much money do you need to support your standard of living?
How much money do you need to maintain your lifestyle, shop, travel, enjoy yourself, pay for medical expenses, support charitable causes you value….as well as provide financial support to children, grandchildren or relatives?
These answers are obviously very personal and will be different for each of us. One of the roles that we play as financial advisors is to help you, if you need it, to quantify how much money you will need in the future, to support the lifestyle that you desire.
In developing your investment plan, how you define “enough” is vital, as it defines your need to take risk. The more wants and needs that you desire, the larger the portfolio you will need to support your lifestyle. The more financial assets that you need, the more financial risk that you may need to take, and for how long, depending on what assets you already have and your ability to save.
If you already have adequate resources to support your lifestyle, then you would have less need to take financial risks. We would work with you to focus on maintaining your assets, taking intelligent steps to reduce your risks, such as being broadly diversified and determine an appropriate exposure to stocks. If you have already “won” the financial game, meaning you have adequate assets to meet all of your needs, your plan and strategy should be developed so that you don’t permanently lose a significant portion of your financial assets.
If you already have significant assets, then you should consider whether your portfolio has excess risk. Is the risk you are taking to reap potential stock market gains worth it, versus the potential negative outcome of financial losses?
A few things to consider. As your wealth and portfolio grow, some people convert what were once desires into needs or wants. Desires become expectations and reality. A vacation or trip that once seemed unattainable becomes an annual part of your life. You go from one home to wanting a vacation home. The nice car becomes a luxury car. These are all choices each of us make. Myself included.
These changes, which can occur gradually over time, can increase the need to take risk (and to save more), to cover the additional expenses as your lifestyle changes. If you need to take on more risk, you would need to increase your equity allocation. And that can lead to problems when risks appear, such as in 2000-2002 and 2007-08, and other time periods. While these losses were not permanent, they can be emotionally difficult without proper guidance, planning and your emotional ability to handle the risks and market volatility.
We advise clients when developing their investment plan and asset allocation. It is generally important to have some exposure to stocks, so your portfolio has some opportunity for growth which exceeds the rate of inflation, so you don’t lose your spending power over the long-term. But this may mean that if you have adequate (enough) resources for your needs, you likely don’t need to have more than 50% (and maybe even less than that) invested in stocks.
Some risks are worth taking. Sometimes you need to take long-term, rational financial risks, especially if you need to accumulate and grow your financial resources over a long time period.
However, some risks are not worth taking, or risks should be reduced. Prudent investors should not take on more risk than they have the ability, willingness or need to take.
The important question to ask yourself, and discuss with your financial advisor, is where are you in this financial game? What inning are you in? Are you winning, losing or still have a long way to play? How much risk do you really need to take?
If you have already won the financial game, are you only taking the financial risks which need to be taken, and not excess risk?
We would be pleased to discuss this important topic with you, or with others close to you, who could benefit from such a discussion or portfolio review.
Talk with us.
This blog post was inspired by “Enough,” an essay in Appendix E of the book Reducing the Risks of Black Swans, by Larry Swedroe and Kevin Grogan, 2018 Edition.