Risk Isn’t a Preference - It’s a Requirement
Designing Portfolios for Real Life
Most conversations about investing start in the same place:
“How do we get the best return?”
That sounds reasonable—but it skips a more important question:
What level of risk is actually appropriate for this portfolio?
Not in theory, but in real life.
Because investment risk isn’t just volatility on a chart. It’s the possibility that a portfolio declines and takes time to recover—and whether that recovery timeline fits within a client’s ability to stay invested.
That’s where I begin.
Start With Constraints, Not Forecasts
When I design a portfolio, I don’t start with market forecasts or long-term averages.
I start with constraints—because real financial plans succeed or fail based on what must work, not what might work.
The most important constraint is timing.
A portfolio typically has two distinct jobs:
Provide dependable spending in the near term
Grow to support spending further in the future
Trying to force one set of investments to do both creates unnecessary risk.
So instead, the portfolio is divided into roles.
Separating Stability From Growth
To solve this, portfolios are structured in two parts:
Bonds are used to fund known spending needs over roughly the next 10 years
Equities are used for growth beyond that period
This creates something critical: time.
Because near-term spending is already covered, the equity portion of the portfolio does not need to be stable year to year. It doesn’t need to avoid all declines. And it doesn’t need to be optimized for the highest possible long-term return.
Instead, it needs to meet a more specific requirement:
It must be able to recover from downturns before those bond reserves are depleted.
Risk Is About Recovery, Not Just Decline
Markets will decline. That’s not avoidable.
What matters more is:
how far a portfolio falls
how long it takes to recover
and whether that timeline fits within the plan
Based on historical analysis, I use a practical constraint:
Temporary declines of up to ~6 years are acceptable
Longer recovery periods materially increase planning risk
That becomes the key design rule for the equity portfolio.
Defining Risk as Part of the Planning Process
One area where this approach differs from common practice is how risk is determined.
In many cases, clients are asked to define their own “risk tolerance,” often through questionnaires or general preferences. While that input matters, it can also shift responsibility in the wrong direction.
In reality, risk in a portfolio isn’t just a matter of comfort—it’s a function of what the plan requires and what the client’s situation can support.
Part of the role of an advisor is to define a reasonable range of risk based on those constraints:
how much the portfolio needs to grow
how much may be withdrawn from it
and how long it needs to remain resilient during downturns
Within that range, client preferences absolutely matter. But the range itself should be informed by the structure of the plan—not left entirely open-ended.
In most professions, technical decisions are guided by expertise. A doctor doesn’t typically ask a patient to determine the appropriate dosage—they evaluate the situation and recommend a range that is both safe and effective.
Portfolio design works in a similar way.
Clients aren’t expected to determine the right level of risk on their own—that’s part of why they seek guidance in the first place. The goal is to use that experience to define a range that fits their situation, and then help them make informed decisions within it.
Why I Don’t Optimize for “30-Year Returns”
You’ll often hear that “stocks outperform in the long run,” usually framed over 20- or 30-year periods.
That’s generally true—but it can be misleading in practice.
A portfolio that performs well over 30 years can still struggle significantly in the first 10. And in real financial plans, that early period matters more.
Since the bond portion of the portfolio is designed to cover roughly the next decade, the transition point between stability and growth becomes critical.
So instead of optimizing for distant outcomes, the equity portfolio is designed around:
rolling 10-year periods
recovery reliability
and the ability to stay invested through difficult markets
How the Equity Portfolio Is Built
The equity allocation is designed with three priorities, in order:
Survivability
Can it recover from downturns within a reasonable time?Diversified sources of return
Does it rely on more than one “engine” to drive recovery?Long-term growth potential
Does it still reward patience over full market cycles?
To meet these goals, the portfolio combines different types of equities:
Smaller companies, which have historically contributed to long-term returns
Value-oriented stocks, which often recover strongly after market stress
Large companies, which tend to lead early recoveries
International stocks, which reduce reliance on any single market
No single approach dominates.
That’s intentional—concentration increases the risk of extended recovery periods.
When Risk Is Worth Taking
Some investments come with longer recovery timelines.
That doesn’t automatically make them inappropriate—but it does raise the standard they must meet.
If an asset introduces:
higher volatility
deeper drawdowns
longer recovery periods
then it needs to contribute meaningfully to long-term growth.
If it doesn’t, it doesn’t belong in the portfolio—no matter how compelling the theory behind it may be.
Why I Don’t Build Around “Outperformance”
There is a lot of discussion in the industry around strategies designed to outperform the market.
Some of these ideas are supported by research. Some have worked in certain environments.
But in practice, many of them:
depend on specific time periods
require extended stretches of underperformance
and are difficult to maintain in real portfolios
That doesn’t mean they’re invalid.
But it does mean:
Outperformance is not something I assume or build around.
Instead, the focus remains on:
defining risk first
ensuring the portfolio can recover within the required timeframe
and allowing growth to happen without relying on specific outcomes
The Goal: A Portfolio You Can Stay Invested In
The most important characteristic of a portfolio isn’t how it performs in ideal conditions.
It’s whether it can be sustained through the non-ideal ones.
Because even a well-designed strategy fails if it requires decisions that are too difficult to follow in real time.
