Most investment conversations start in the same place: performance.
- What did the market do?
- What are we expecting next year?
- Should we be more aggressive?
Those questions are not wrong, but they are missing the right starting point for investment decisions. Our baseline should not be the current market’s performance. The best baseline is understanding what you need for your financial plan to be durable throughout your retirement years.
One of the first calculations we run in a financial plan is what we call a required rate of return. It is simply the collective portfolio return necessary to support your spending goals over time with a comfortable margin. We are not looking for anything that looks like “beating the market” at this stage.
That number often surprises people. Sometimes it is higher than expected. A household retiring early with significant spending needs may truly require long-term growth in the 8% range. In that case, reducing equity exposure every time markets feel uncomfortable is not a luxury the math allows.
Other times, the number is much lower. We see families who need only 3–4% because they have built more assets than their lifestyle requires. In that situation, chasing higher returns may introduce volatility that the plan simply does not require.
Two households can hold identical portfolios and have very different levels of risk. A $10 million family spending $300,000 per year has a different margin than a $3 million family spending $250,000. Their margin for volatility is very different.
The real question becomes this: if markets underperform for a stretch, how much would actually have to change? Would retirement timing move? Would spending adjust? Or would the plan absorb it without disruption?
Once you understand your required return, investment strategy stops being about raw maximization and starts being about funding a life you enjoy living. We love the idea of earning more than you need, but taking more risk than you need is different.
Don’t prioritize beating the markets by overexposing your plan to undue risk. Anchor to your number and follow the game plan.
