Check out our video on this topic here
In today’s blog, we’re going to walk through the framework that we use when building out our clients financial and investment planning.
We're going to cover concepts like portfolio structure, understanding common retirement risks like sequence-of-returns risk and concentration risk, and why is some cases, people's approach to diversification may be incomplete.
Now let’s start with a hypothetical scenario that illustrates principles we've seen play out multiple times in various forms.
Imagine a couple—we'll call them Sarah and Mike. Both worked at the same company for thirty years as loyal employees and proud of their tenure.
Over the years, they accumulated significant savings in their 401(k). But here's what happened: their retirement account became heavily concentrated in their employer's stock—imagine over sixty percent of their entire retirement savings tied to a single company.
"It's been so good to us," they might say. "We know this company. We've worked here our whole careers. We understand the business."
But then consider what could happen if that stock experiences a significant decline right before retirement.
Perhaps due to industry disruption, regulatory changes, competitive pressures, or company-specific challenges.
Suddenly, their retirement timeline and financial situation could be facing serious challenges.
Now, this is a hypothetical scenario, but it illustrates real principles.
This isn't really about bad luck or unfortunate market timing. This demonstrates what we would call, concentration risk—a situation where income, employment benefits, healthcare coverage, and retirement savings are all tied to a single source of risk.
When one factor affects the company negatively, it could create a cascade effect across multiple areas of one’s financial life simultaneously. That's not diversification—that's amplified exposure.
You might be thinking, "Well, I don't have all my money in one stock, so this doesn't apply to me." That's good awareness.
But here's an important point that might be less obvious: many retirement portfolios lack a truly systematic approach, even when they appear diversified at first glance.
Some investors select mutual funds or ETFs based primarily on recent past performance—which, as required disclosures always state, is not indicative of future results.
They check balances occasionally, maybe once a quarter or when market news catches their attention.
Perhaps they make adjustments based on how things "feel" or what they're hearing in the news.
They might even add an investment that performed well last year, thinking that trend will continue.
And while these reactions might feel proactive—like they're "doing something" to protect their money, in reality, without a systematic framework guiding those decisions, they could be replacing structure with guesswork.
And that turns investing into something closer to speculation at the stage of life when you might theoretically be looking for stability and sustainability.
When portfolios operate without systematic structure, several risks can quietly accumulate—and they might not become apparent until market conditions change.
The first isliquidity risk—discovering too late that investments may not be able to be converted to cash quickly enough, or without significant loss which can force decisions under pressure rather than according to plan.
The second issequence-of-returns riskwhich refers to the risk of potentially experiencing negative returns early in your retirement, combined with taking withdrawals, which in some cases could permanently impair one’s portfolio's ability to sustain income over a lifetime.
The third isconcentration risk, which we just discussed—where too much wealth is tied to a single company, sector, or even asset class.
So what principles separate more structured, institutional approaches from less systematic individual approaches?
It's often aboutprocess—a framework that helps remove emotion from decision-making and replaces reactive behaviors with systematic thinking based on predetermined principles.
Research has actually demonstrated this. Studies have shown that portfolios left essentially untouched for extended periods—following a consistent asset allocation—have sometimes outperformed portfolios that were frequently adjusted by active managers making tactical decisions. Not always, and there are no guarantees, but the principle is important: structure can reduce emotional interference.
Now, let’s switch to liquidity risk and here is a question we pose when discussing this. Can you clearly articulate how much of your portfolio needs to remainaccessible—meaning readily convertible to cash without significant loss—once your regular employment income stops?
Let’s illustrate with a hypothetical. Imagine it's during a significant market downturn—let's say a 20-25% decline in equity markets. Portfolio values have dropped substantially. But you need $15,000 next month for property taxes.
If adequate liquidity or withdrawal planning hasn't been done, you could find yourself in a precarious position.
Consider someone who has invested their money in assets that are either illiquid or would incur significant penalties or losses if accessed early like some real estate partnerships, or long-dated instruments.
When an unexpected $20,000 medical expense arises, they could face a difficult choice.
Here's an educational framework of layering your portfolio which illustrates how we like to think about this process.
Layer one: This might cover near-term spending needs which can vary based on individual circumstances, risk tolerance, other income sources, and personal comfort levels.
But generally speaking, this layer might be held in more liquid and accessible investments which are not necessarily focused on trying to achieve maximum portfolio returns further out on the spectrum of risk.
And Layer twowhich might consist of those more growth-oriented investments with longer time horizons.
The concept is that this layer could potentially be repositioned periodically to essentially replenish layer one according to a predetermined schedule rather than reacting to market conditions or urgent needs.
Pause for a moment and consider: Have you actually calculated your liquidity needs across different time horizons? Do you know how much you'll need in year one of retirement? Year two? Year three?
Once you understand what needs to remain accessible, the next question becomes: how do you measure whether your overall plan is actually working? How do you know if you're on track?
You've probably heard of the "four-percent rule” as it’s become almost shorthand for retirement planning.
And if you haven’t, it’s guideline suggesting that withdrawing approximately four percent of a portfolio's initial value, adjusted annually for inflation, might sustain that portfolio over a 30-year retirement period based on historical market returns.
Here's what's critically important to understand about this: it's a historical observation based on specific assumptions, specific time periods, and specific asset allocations from past market conditions.
But in reality, the four-percent rule doesn't account for individual tax situations, which can vary enormously.
It doesn't account for actual inflation rates that you could experience, which could differ from historical averages.
And it doesn't account for different asset allocations or individual risk tolerances.
The bottom line is, investment returns can change, market conditions can change, economic conditions can change, and even policy environments can change.
With this, the question becomes: how often should you review your portfolio? How do you monitor progress without either obsessing over every market movement or neglecting your portfolio entirely?
This is where systematic discipline can be important. There's an educational principle here about trying to avoid these two extremes.
One extreme being checking your accounts daily or even multiple times per day couples with watch financial news constantly and making frequent changes based on short-term market movements, interest rate announcements, or political developments.
On the other extreme, some investors never review their portfolios. They set an allocation years ago and haven't looked at it since.
They don't consider how their circumstances may have changed whether they're now closer to retirement now, maybe their risk tolerance has shifted, or even how their asset allocation may have drifted significantly from its original target due to market movements.
A more systematic approach that we like to follow might involve predetermined review schedules rather than reactive checking.
Perhaps quarterly reviews to monitor overall progress and annual deeper reviews to consider rebalancing, tax planning, or strategy adjustments.
This could potentially help to remove emotion from the decision: the question isn't "Should I do something?" but rather "Has my predetermined threshold been reached?"
And another important consideration: the potential for hidden costs associated with excessive monitoring and activity.
What we would refer to as "behavioral cost" which is the tendency to make emotionally-driven decisions when constantly watching market movements.
Studies have shown that investors who check their accounts more frequently are often more likely to make reactive decisions that undermine long-term results.
To keep it simple, consider a 5-Pillar Approach:
Asset class diversification: Are my investment holdings diversified to fit my individual need? Whether it be stocks, bonds, real estate, cash, or alternatives.
Geographic diversification: Do I feel most comfortable with US based investments or should I have exposure abroad?
Sector diversification: Am I overly concentrated in any particular sector of the market and if so, is there a reason for this or should my assets be more spread out?
Time diversification: This relates to the liquidity ladder—having assets with different time horizons and maturity dates aligned with spending needs.
And Tax Planning diversification: This involves having assets in different account types—tax-deferred (traditional IRA/401k), tax-free (Roth), and taxable accounts—which could provide flexibility for tax planning during retirement.
The Final Word:
Our goal when planning is about having a framework rather than making reactive decisions in isolation.
Of course, this is not financial advice for any individual situations and we always suggest speaking with your financial professional when coming up with your plan.
Thanks for reading!
Disclaimer:
Rockline Wealth Management (RWM) is a registered investment adviser located in Islip Terrace, NY. RWM is registered with the U.S. Securities and Exchange Commission. Registration of an investment adviser does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission.
Rockline Wealth Management does not offer tax or legal services. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation.
All information presented is believed to be factual at the date of publication. This blog should not be viewed as advice for any individual and is intended for general informational purposes only.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client's investment portfolio.
Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. The opinions expressed and material provided are for general information and should not be considered a solicitation of financial advice or for the purchase or sale of any security.
Real-life and fictional examples given in this blog should not be viewed as guaranteed outcomes when investing. Past performance is not indicative of future results and every individual’s investment circumstances are different. Individuals should consult their financial professional before implementing their investment plan.
Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance or a representation as to the future.