Wealth Accumulation Targets
Can Help Insulate You From Volatility
If you think about it, the more insulated you are from the portion of your assets exposed to normal or even elevated volatility, the less concerned you need to be about normal 1-year, 3-year and even 5-year volatility. We think this can help you be a better investor.
For instance, clients of ours who have 1x, 3x or even 5x their annual spending, grossed up 40% for taxes, in Safety Assets (bank accounts, money market accounts, CDs, Treasury Bonds) are greatly insulated from short term market volatility and can cooperate with us in better ways with their portfolio management during volatile times.
The same is true for Market Assets (stocks, bonds, mutual funds, ETFs and other semi-liquid holdings). Reaching our recommended targets of 30x or more of annual spending grossed up for taxes, provides the endurance characteristics consistent with strong, confident investors. Having the proper portion of these funds in quality fixed-income instruments extends the insulation from 5-year volatility events to at least 10-year volatility events. This is superb.
Earned and passive income sources not highly associated with investment markets further insulates clients from normal to extreme periods of volatility. It is why we consider and build such income streams and assets into investment and financial plans.
While there are many methods to practice risk aversion in portfolio management, achieving proper asset accumulation targets is the first line of defense.