The Importance of Time
It would be irresponsible to invest all of next month's mortgage payment in stocks. It would be similarly irresponsible to invest all of a newborn's college fund in bonds. This contrasting example illustrates an important point: Money has a lifespan and should be invested over the period in which it will be used.
At Golden Bay, we work with clients to segment their wealth into various “buckets” and calibrate the risk level of each bucket based on the time frame over which it will be used. Our bucket approach ensures that there is enough liquidity in short-term accounts for clients to have the ability to take an appropriate amount of risk in long-term accounts and ride out the inevitable ups and downs in the market.
“Money has a lifespan and should be invested based on the period over which it will be used. ”
Example A
A client in her 40s may have a savings account held mostly in cash for emergencies; a balanced taxable account, representing savings for future purchase of a beach house; and a Rollover IRA, nearly all of which is invested in stocks.
Example B
A retired client in his late 70s may have a taxable account holding mostly cash and bonds; an IRA with a fairly modest allocation to stocks; and a trust for his twin granddaughters that is heavily invested in stocks.
When wealth is viewed and managed in these terms, a “conservative” woman at the start of her career could very well have an IRA that is aggressively invested in stocks and a self-proclaimed “aggressive investor” in retirement would probably have the money from which he takes a monthly draw invested in a conservative allocation. It’s the time frame over which the underlying assets will be used that determines whether the allocation for each bucket is “conservative”, “moderate” or “aggressive” - not the self-ascribed label of the underlying client.