Rather than following a disciplined retirement savings strategy, many people rely on their gut and make intuitive estimates of a single aspirational number, which reflects the amount of money they 

 they need in the bank to enjoy retirement bliss. This is often referred to as 

— the minimum required net worth that would enable you to say to the world, 

So, what’s your Number? Think about it for a minute. Was it always the same — or has it changed over the years? Or is there no Number that would move you to retire because you always want to be working in one capacity or another?

It turns out that the more money you are worth today, the more you probably feel you need to accumulate further before calling it quits. Consider the goal of becoming a millionaire, still attainable for Americans living at the median US wealth level of $125,000 and who still have plenty of working years ahead of them. When upwardly mobile middle-class Americans move into the ranks of millionaires, rather than celebrating, many are more likely to focus on the fact that $1 million is not what it used to be and may not be nearly enough to sustain their lifestyle in retirement. Indeed, in the United States alone, there are roughly 22 million millionaires in 2023, so they are not exactly a rarity.

Once these Americans accumulate a net worth of $2 million to $3 million, they begin to enjoy some sense of financial security and success — but soon realize that $5 million is the true inflection point between merely affluent and wealthy. Those with $5 million want $10 million. Those with $10 million think $25 million or even $50 million would do the trick. And so it goes all the way up to the Forbes 400, where $2.7 billion is simply the cover charge in 2023. The irony is that, along the way, everyone who is not in financial distress recognizes full well — or claims to recognize — that they are not in it for the money.

 magazine, captured this constant resetting of expectations in a provocative 2006 book called 

. The inspiration for Eisenberg’s book, which, appropriately enough, featured a nest egg on its cover, was the author’s own struggle to understand exactly how much money he needed to sustain himself and his wife in retirement. The process of answering this seemingly simple numerical question led him to much deeper questions about what kind of life he wanted to lead, in the present and in the future.

Eisenberg captured many interesting aspects of how people think about money and how interconnected money has become with almost every facet of our lives. Perhaps most interesting and telling of all is his conversation with an anonymous Wall Street type whom Eisenberg calls “Deep Pockets.” When Eisenberg asks him to explain how he thinks the Number “works its will” among the relatively well-off people he knows, Deep Pockets describes four types of lifestyles: 

“Comfortable, Comfortable Plus, Kind of Rich, and Rich Plus.”

The archetypes, according to “Deep Pockets” are:

Lives in one place, eats/travels modestly, though better than most . . . then you need $50,000 to $100,000 a year or a Number ranging from $1 million to $2 million.

Country club, second home . . . then you need $175,000 to $200,000 a year or a number ranging from $2 million to $5 million.

Couple of houses, gives away money, likes the finer things of life . . . then you need $350,000 to $500,000 or a number of about $7 million to $10 million.

A place for every season, fractional jet shares for travel, sits on boards . . . then you need $1 million plus a year and a number greater than $20 million.

Eisenberg does not describe the underlying assumptions behind Deep Pockets’s rough calculation, though the number specified is about twenty times the expected annual spending. Indeed, almost every financial firm has a detailed retirement calculator that will provide you with an estimate of what you need to retire. The problem is that to arrive at your Number, either they or you must quantify several key inputs that in most cases are simply educated guesses. Some are estimates of your life expectancy, current income, and anticipated retirement age, as well as future inflation, tax rates, and stock returns. Based on the assumptions used by the calculator, and by adjusting the variables, notably the estimated rate of return of your portfolio, you can, frankly, arrive at almost any Number.

As you go through life, your goals will continue to evolve. In some cases, such as the Number you desire for retirement may be an ever-moving target. The lesson here is: to ensure a purposeful and well-lived life, the journey towards achieving these goals is almost always as important as achieving them!

From the Book: The Aspirational Investor By Ashvin B. Chhabra (ABC)

THE NUMBER or How much Money do I need?

Your goals and aspirations seem so personal, and perhaps so idiosyncratic, that they may defy any attempt to create a general framework that would logically organize them, let alone build a wealth management strategy to achieve them. But the work of one of the stars of academic psychology, Abraham Maslow, helps point the way.

In the early 1950s, Maslow was pioneering a new approach to the study of human behavior. Instead of focusing on the mentally ill, as was the convention at the time, he studied “exemplary people” — the top 1 percent of achievers in various fields, such as contemporaries Albert Einstein and Eleanor Roosevelt. Maslow’s groundbreaking work, the basis of what is today called humanistic psychology, includes a breakdown of the psychological underpinnings of human aspirations. These are often illustrated in a famous pyramid known as 

Maslow’s pyramid spans five categories that can be boiled down to three essentials: the need for food, shelter, and safety, that is, basic requirements for survival; the need for family, friendship, and intimacy, which creates a sense of belonging, love, and acceptance; and at the top of the pyramid, a need for self-esteem and “self-actualization,” defined as the ability to pursue your interests, which may include charity and service to others. As Maslow succinctly put it, 

At first glance, Maslow’s hierarchy of needs may seem unrelated to the discipline of investing.

But if you define risk as the failure to meet your needs (or goals), then the hierarchy of needs provides an elegantly straightforward way to think about how to order those goals and the consequences of falling short. Using Maslow’s framework as inspiration, every investor can categorize and prioritize their goals as follows:

 the certainty of protection from anxiety or poverty. Risks include loss of employment, health issues, loss of life (as a risk to other family members), accidents, and so on.

In order to meet your Essential Goals, you must construct a safety net that protects you from the variety of risks listed above, including extreme market volatility. In other words, you must achieve a certain level of 

 this enables and facilitates the process of nurturing and supporting those who are important to you, including a spouse, your family, and peers.

In order to meet your Important Goals, you must achieve a high probability of maintaining your current standard of living. In other words, you must achieve 

A way to pursue your dreams and aspirations

: this includes further education, starting or expanding a business, philanthropic giving, or other Aspirational Goals like travel.

In order to meet your Aspirational Goals, you might have to allocate capital to projects that may be viewed as uneconomical or to investments that, in adverse circumstances, may result in catastrophic losses. Therefore, your pursuit of Aspirational Goals must be sized appropriately to recognize the possibility that the capital invested in such idiosyncratic endeavors may be completely lost.

The way to get a handle on your goals is to make a list; categorize them as 

; and quantify the cost by deconstructing each one into a series of cash flows. Saving for retirement isn’t your only goal, of course. Other financial goals include saving for a child’s college education, buying a new car, purchasing or maintaining a vacation home, or starting a business.

Different people will categorize the same types of goals in different categories. This prioritization depends on a variety of factors, such as your age, how much money you have relative to your needs, and the simple fact that one person’s essentials may be another individual’s aspirations.

Finally, while the Maslowian hierarchy of goals is often depicted as a pyramid — that may be misleading. In terms of resource allocation, Essential Goals must clearly be taken care of first. In general, one tries to simultaneously work toward achieving all of one’s goals in life — and Aspirational Goals are often psychologically just as important as all the others.

Excerpt adapted from The Aspirational Investor by Ashvin B. Chhabra (ABC)

Goal prioritization in the Wealth Allocation Framework & The work of Abraham Maslow

Every year, the US government collects vast amounts of data on the net worth of families across the country.

Number crunchers at the Federal Reserve, the nation’s central bank, analyze Americans’ net income, credit card debt, the value of homes and mortgages, bank balances, investment portfolios, and more. These data are cleaned up, dissected, tabulated, and published every three years as The Federal Reserve Survey of Consumer Finances. Notwithstanding its dry name, the report provides a fascinating, yet sobering, portrait of the wealth distribution in what is arguably one of the wealthiest countries on the planet. 

As students of the hard and soft sciences well know, the typical spread of randomly distributed data often resembles a bell curve, whether it’s the variation in performance on a standardized test or the height or weight of children in a fourth-grade class. Most data points cluster toward the average, creating a pronounced hump in the center of the curve, with fewer data points extending symmetrically outward on both sides. This distribution is so common that statisticians refer to it as the “normal distribution.” However, the wealth distribution in America stands in sharp contrast.

When the household net worth of all US families is mapped onto a graph, the resulting picture reveals a very skewed distribution of wealth.

 demonstrates, wealth is neither uniformly nor normally distributed. Instead, there is a “long tail,” implying a concentration of wealth among a few. In fact, a third of the nation’s wealth is shared by the bottom 95 percent of all families — those with a net worth below $2.3 million. A second third is shared by the roughly 5 percent of Americans who possess between $2.3 million and $13 million in net worth. The final third is controlled by just 1 percent of the population with upwards of $13 million, a group that includes the members of the elite Forbes 400, the business magazine’s famous annual ranking of US billionaires. The long tail of wealth distribution by household is nothing thing new: throughout the Middle Ages in Europe and Asia, the nobility and landowning families maintained a firm grip on resources in their nations and enjoyed a gilded life, even as most of the population toiled in poverty. The Industrial Revolution brought vast improvements in living standards as power from steam, coal, and oil supplemented human labor, and democracy and property rights took hold in Western societies, lifting millions of people into the middle class.

The distribution of wealth, while markedly uneven in the United States, is even more skewed when analyzed globally. For instance, according to a recent report that carefully sources the world’s roughly $241 trillion in total wealth, 

46 percent of global assets, and the richest 10 percent control 86 percent

. The bottom 50 percent hold less than 1 percent of the wealth. Indeed, recent work by French economist Thomas Piketty and collaborators points to wealth inequality as an inevitable consequence of the capitalistic system. This has, in turn, led to a robust debate over capitalism’s unintended consequences, such as inequality of opportunity and what society or governments should do to address this.

 of the world’s population living on less than a dollar a day, one takeaway from our snapshot of wealth distribution is that Americans are comparatively lucky. Yet, the reality is that most Americans’ financial situation is quite precarious.


Figure Title: Wealth Percentiles for Americans

The table above shows the US wealth spectrum by percentiles — one out of ten US households is bankrupt, possessing a net worth that is negative. Another ten percent have a total net worth of less than $6,370. Approximately one-third of all American families are either already bankrupt or just one cataclysmic event away from complete financial ruin, whether it’s a job layoff, a major medical emergency, or a bad traffic accident.

Such statistics reinforce something that most people already know intuitively: that even in America, a country whose founding mythology promises a shot at success and fortune to anyone who works hard, there is still a deep asymmetry between the sweat that it takes to build wealth and the ease with which it can all be lost.

Even in one of the richest countries on earth — a country, not incidentally, with few social safety nets — money is hard to come by for most families and even harder to hang on to. The central lessons are clear: whatever degree of wealth you possess, you need a strategy that enables you to preserve what you have, regardless of the performance of the economy or financial markets. You must also maintain your standing on the wealth spectrum, by keeping pace with inflation and earning a return on your financial assets that is at least equivalent to the broader market return. And finally, if your aspirations include moving up the wealth spectrum or creating a lasting impact, you should be able to pursue your dreams without jeopardizing your financial safety.

Excerpt adapted from the Book: The Aspirational Investor By Ashvin B. Chhabra (ABC)

The Wealth of America: Where are you on the Wealth Spectrum?

A common but hard to answer question is How much do I need to save for retirement? As Retirement is simply an example of a goal - although it may be THE GOAL! We will eventually tackle that question in this course. However, for now let’s point out that the same question can be asked for any of your goals that need to be funded.

Different financial calculators often provide a wide-range of answers to the same question (e.g how much do I need for retirement) this is because although they all use the same methodology they often differ on at least two important inputs. They choose an estimated rate of return for your investments and a discount factor to present value the future cashflows.

Furthermore some may add a tax rate that changes over time and a life expectancy that changes as each year passes. Throw in a few thousand monte-carlo simulations of financial markets and this leads to very sophisticated calculation where you can pretty much arrive at any number you want.

We will take a vey simple approach - that turns out to be surpassingly useful in providing rough estimates of future needs.

For any Goal estimate the actual cash required if it happened today!

Let’s illustrate how to use this simple methodology by using it on a single simple goal i.e Saving for a down payment for a House.

If you need to fund a down payment for a house a few years from now, first estimate the amount you would need today for an equivalent house say $100,000. That then is the amount to put aside today for your goal.

Amount Needed Today for a Goal in the Future = Amount Needed to fund the Goal Today

(In case you find this strange - let us state that technically we are assuming that your rate of return equals the rate of inflation so everything that you need in the future is always being calculated in todays dollars. Or todays purchasing power.) It is not an exact estimate but in most cases it will be a reasonable and intuitive estimate. Of course you may not have all of that money today but you can then easily calculate the shortfall. Let’s say you have saved $50,000 towards the down payment.

Shortfall = Amount Needed Today - Amount Currently Saved for the Goal

Then the total shortfall is $100,000 - $50,000 = $50,000

The next year, you would do the same calculation adjusting for whatever happened that year - ie if the money you set aside grew through investing or if you added towards the goal or if the goal became more expensive etc. It will also help you understand if your goals are realistic or sadly at this point of time simply unrealistic - and then help you make suitable adjustments well before! If you still have time left - then:

Amount Needed to be Saved This Year = Shortfall / Number of Years left

Let’s say you plan to buy a house 5 years from now and your shortfall in the downpayment is $50,000. Then the estimated amount you need to save this year towards the goal is $50,000/5 = $10,000. Next year, since you would only have four years left, you would repeat the calculation, i.e make a fresh estimate of the total shortfall and add an amount equal to the total shortfall divided by four towards the goal. And so on till you are ready to buy the house! Of course - then you will have to make sure you have enough for many other expenses that come with owning a house, and that is the subject of another article!

A VERY SIMPLE CALCULATION (for tough questions)

Just as the goals of each risk bucket are different, so, too, are the investments you will hold within them, as well as the way each portfolio is constructed.

For example, you can put together your Safety Portfolio by considering your various risk factors and allocating resources (buying insurance) to mitigate them. This can range from buying a permanent home by making a large down payment on a reasonable home along with a long-term, say, thirty-year mortgage to buying enough term life insurance to protect your family in case of an unfortunate event. 

The allocation of capital to mitigate each kind of risk in the Safety Bucket can be quite uneven, given that you are, in essence, buying various kinds of insurance and paying the corresponding premium demanded.

In the Market Bucket, the goal is achieving market return, with minimal volatility, through diversification. You are avoiding the evils of concentration and leverage.

A great deal has been written about the best way to construct a Market Portfolio — but the key is diversification without compromising quality. We emphasize that indexing is a powerful, low-cost way of achieving diversification, which has led to excellent results over the long-term.

Finally, capital allocated to the Aspirational Bucket is often focused on one principal venture — one you are passionate about and have some expertise in. 

As we have seen, the evils of concentration and leverage in the Market Bucket are your friends in the Aspirational Bucket — with two important caveats. You should have some expertise or comparative advantage (alpha) in your investments here, and the leverage must be non-recourse.

Once you are satisfied that your risk allocation properly expresses how much risk you can (and should) comfortably take, it’s time to stress test to make sure your assets are prudently allocated across the Safety, Market, and Aspirational Buckets.

Ensure that your risk allocation and supporting portfolio strategy are as shockproof as you can reasonably make them. A standard Monte Carlo scenario analysis tool, such as those employed by many financial advisors, will provide you with the probability of achieving your goals. You want to be on track for reaching your Essential Goals with at least 80 percent probability, perhaps closer to 95 percent or 100 percent if you can. However, the incremental cost of certainty quickly becomes prohibitive.

Further, there are many more risks than those measured by the standard deviation of a normal distribution, as we have seen. 

It is thus important to test your portfolio against those seemingly “rare” market disruptions that seem to occur with alarming frequency.

This is the simplest, of course. Imagine you are in a situation where the market has fallen by 50 percent, and your aspirational assets are worth zero. Your Safety Portfolio may also have taken a hit, with your home value down 20 percent. What impact does this situation have on your Essential Goals and meeting your family’s basic needs? If the results are catastrophic or unimaginable, you definitely need to rethink your current portfolio: such crashes can and have occurred throughout history, especially in the span of a human lifetime.

You Might Also Wish to Test Your Strategy Against a Few Other Extreme Events, Such as the Following:

You lose your employment, your income ceases while your expenses remain constant, and the markets drop 50 percent. Would you still be able to protect your current standard of living? For how long? Could you keep key assets like your home, or would you be forced to sell them at fire-sale prices?

For how long can your core financial assets (excluding personal assets like a home or car, as well as your aspirational investments) sustain your lifestyle?

Looking exclusively at your Aspirational Goals, are you satisfied that there is a reasonable chance of achieving some of them? If not, would you be willing to take more risk, without endangering your Essential Goals? Would you be willing, instead, to adjust your Aspirational Goals?

Define your hard-to-quantify risks. Could the cash flows change? Could your family situation change? What about a once-in-a-century earthquake or hurricane? Under what circumstances might there be no buyers when you wish to sell? What would happen if [...]?

Tests such as these are often hard to quantify, so there is a tendency to skip them or at least not review them regularly. But in a really challenging situation, the soundness of this thinking will be critical to the survival of your wealth management strategy and offers the added insurance that your Essential Goals will be able to withstand such shocks.

It’s important to track how you are doing annually and reassess your goals and risk allocation throughout market cycles and in the context of your current life stage. Simply put, you must evaluate how much security you need (Safety Portfolio) versus capital you are willing to risk losing completely (Aspirational Portfolio), and then put the rest in a diversified Market Portfolio.

The truest test of a successful investing and wealth management strategy is whether it can effectively insulate your Essential Goals from the whims of the financial markets, while simultaneously positioning you to achieve Important Goals and preserving your opportunity to achieve Aspirational Goals.

In addition, your optimal strategy should be easy to understand and provide clarity on the steps required to get back on track, should adverse circumstances prevail.

Risk Allocation & Risk Buckets Stress Testing your Portfolio

Money will not buy you happiness, but wealth does provide safety and comfort, and more importantly, it creates choices and opportunities. Whether your goal is to grow your wealth or simply preserve it, how wisely you invest your assets will play a significant role in the quality of the life you and your loved ones will lead.

Unfortunately, most people, even those who are otherwise smart and successful, lack a basic understanding of financial markets and make poor investment decisions. The problem is compounded by the fact that a great majority of us either do not realize our incompetence in financial matters or are simply unwilling to admit that it has a negative impact on our relationships and personal lives. The emphasis becomes “How can I increase my returns or consistently beat the market?” instead of “How can I achieve my major life goals with some degree of certainty?”

If the markets don’t really care about you, as they surely do not, why should you spend all your time and effort trying to beat them?



You certainly do not want the great successes of your life dependent on the future performance of financial markets.

The Wealth Allocation Framework offers an entirely new approach to managing wealth—one based not on the markets but on achieving personal goals and carefully managing both financial and non-financial risks.

The Framework begins with the idea that a truly comprehensive wealth management strategy must accommodate the dual need for financial safety and wealth creation, while also enabling you to maintain your standard of living over your lifetime.

The primary focus revolves around defining your personal objectives and then optimizing your financial assets and your human capital, including earning potential, around those objectives.

You must be able to sustain your living standard and meet your financial obligations 

throughout your lifetime and likely long retirement, regardless of prevailing market conditions.

 Too much volatility at the wrong time can sink your strategy, unless you’ve properly insulated yourself against the whims of the financial markets.

Still, managing investments isn’t just about financial safety. Attaining substantial wealth or creating a lasting impact often requires aspiring to lofty goals while managing and mitigating multiple risks. Whether it’s launching a new business, holding on to a large, single-stock position, or investing in a promising project, there should be a place in your portfolio to pursue your aspirational ventures without jeopardizing your financial security. For many people, especially those with entrepreneurial leanings, a life of ignoring aspirations can be unfulfilling or, shall we say, filled with “aspirational regret.”

The Wealth Allocation Framework is designed to accommodate the three seemingly incompatible objectives — Safety, Stability, and Aspirations — that should underpin every wealth management plan.

The first is the need for financial security in the face of known and unknowable risks, fulfilling a strong desire for certainty of protection from anxiety and poverty, i.e., 

The second is the need to maintain your living standard in the face of inflation and longevity. This requires a strategy with a high probability of maintaining your standard of living, i.e., 

The third is the need to pursue Aspirational Goals, be it for personal wealth creation, creating positive impact, or leaving a legacy. This alludes to the possibility of achieving upward wealth mobility and creating the potential to meet your 

Thus, risk is re-defined as the probability of not meeting your Essential and Important Goals, and appropriate consideration is given to achieving Aspirational Goals.

Pulling all this together is not easy, but we can create a logical, step-by-step process to ensure all your resources are aligned to achieving your life goals.

The Wealth Allocation Framework provides a pragmatic, multidimensional approach to managing risk in relation to your goals. Appropriate risk management i.e., risk allocation, is achieved by creating three distinct risk buckets or portfolios — Safety, Market, Aspirational — to support each of the corresponding three key objectives of your wealth management strategy. But before we delve deeper into those we need to first identify and prioritize your goals!

Introduction to The Framework

As with any new approach, the hardest part is figuring out how to get started. If you are reading this, then you should already be well on your way!

Start simply, by documenting all of your goals.

The next step is to categorize all your goals as either 

Defining your goals as expenses involves just two simple calculations: How much you need, and when do you need it?

 to quantify the total amount you need to save for almost any goal in the future. Simply figure out what it would cost today! If you have several years to save for a goal, then you can just divide by the number of years to figure how much to save each year. Nothing could be simpler!

Intuitively, it might seem that funding Essential Goals should take precedence over saving and investing to achieve 

. Indeed, Maslow’s hierarchy of needs, a starting point for organizing your goals, seems to suggest a natural ordering — funding Essential Goals first, then the Important Goals, and finally the Aspirational Goals. While this may be true, it is too simplistic in many ways.

Maslow’s expression of human needs does indeed resonate with people across all cultures, as shown by research based on the Gallup World Poll, an illuminating survey on well-being that queried more than sixty thousand respondents from 123 countries. This study also found that people prefer to work toward many kinds of goals simultaneously. Human needs are “like vitamins,” as one of the researchers explained in an interview with 

And so it goes with the Wealth Allocation Framework. You don’t need to have your safety net fully funded to begin the pursuit of an Aspirational Goal. It is a good strategy to start by funding your Essential Goals. But once you have a short-term safety net, you could also fund Important and Aspirational Goals, thus building assets across your total portfolio simultaneously.

Step 4: Construct Your Net Worth Statement

Pulling together everything you own and everything you owe — your marketable securities, insurance policies, stock options, your home, and loans (such as a mortgage or student loans) — affords the opportunity to create a unified framework for managing your financial resources.

Step 5: Organize Your Net Worth Statement

This is the step where you organize your assets and liabilities across the Safety, Market Risk, and Aspirational Risk Buckets.

In the Wealth Allocation Framework, assets that provide safety and have the potential to hold their value in a market crash should be allocated to the Safety Portfolio. Assets that provide a risk-adjusted market return belong in the Market Portfolio. And assets that hold the potential for above-market returns, but also carry the potential for substantial loss of capital, should be allocated to the Aspirational Portfolio.

 If your goals are too financially expensive and you do not have the assets to back them up, then changing your investment strategy will not help. The reality of cash flows dominates over speculative investment strategies. You will need to adjust the timing or the expenses associated with some of your goals or find ways to earn or save more money.


What is the “right” risk allocation across your Safety, Market, and Aspirational Portfolios? Alas, there are no exact answers, but there are good guidelines you can follow. Your optimal allocation depends on a variety of objective considerations and should strike a balance between factors such as your age and earning potential, your total current wealth, and the ratio of your assets to the amount you need to sustain your lifestyle. Subjective factors, such as your goals and your ability to bear losses, are also key factors.

It is often easier to identify how much risk is too much. You can approach the issue from two perspectives. A subjective approach captures your personal attitude toward risk: how should you invest so that you can sleep well at night? Some investors are simply more willing to take on risk than others to achieve their goals. On the flip side, an objective approach to risk is defined by your personal balance sheet and your financial ability to absorb losses.

To be sure, there are many more risks than those measured by the standard deviation of a normal distribution, as we have seen. It is thus important to test your portfolio against those seemingly “rare” market disruptions that seem to occur with alarming frequency.

Some of these stress tests are described in the “Risk Allocation & Risk Buckets: Stress Testing Your Portfolio” article — 

Market Meltdown Test, Loss of Employment Test, Sustainability Test, and Aspirational Goals Test.

Wealth is not an absolute number per se. Rather, wealth can and should be defined relative to your needs, wants, and aspirations. This process should be repeated at least once a year — and has the advantage of enabling you to consider modifications to your lifestyle and expenses, if necessary.

A Road Map: A Brief Summary for Implementing the Wealth Allocation Framework

As we’ve seen, individuals and families need an investing framework that delivers on 

The certainty of protection from anxiety and poverty, or 

A high probability of maintaining your standard of living, or 

The possibility of achieving upward wealth mobility and creating the potential to meet your 

These three seemingly straightforward objectives form the foundation of the 

. Importantly, risk is re-defined as the probability of not meeting your Essential and Important Goals, and consideration is given to achieving Aspirational Goals. The Framework, then, provides a pragmatic, multidimensional approach to managing risk 

, is achieved by creating three distinct risk buckets to support each of the corresponding three key objectives of your wealth management strategy.

The successful implementation of the Wealth Allocation Framework depends on properly classifying everything you own within three distinct risk buckets or portfolios: Safety, Market, and Aspirational.

Personal Risk & Safety (Protective Assets)

You must protect yourself from the anxiety of a dramatic decrease in your standard of living. Thus, you must immunize yourself from personal risk: the devastating impact of not being able to meet your essential cash needs regardless of the performance of financial markets. For this, you need 

You must maintain your lifestyle by earning a rate of return in the financial markets that is comparable to the increase in the cost of living. Therefore, you will probably have to take on 

. This is the risk that, according to Modern Portfolio Theory, cannot be diversified away but can be minimized through portfolio optimization.

In order to create the possibility of wealth creation and wealth mobility or to fulfill your Aspirational Goals, you may decide to allocate capital to investments or business ventures that involve idiosyncratic risk and the potential for substantial capital gain or loss.

Because of its diversified nature, the Market Risk Bucket is about 

 focus of Markowitz’s pioneering work. On the other hand, the Safety and Aspirational Portfolios 

 the focus of Frank Knight and Benoit Mandelbrot, among others.

In the Wealth Allocation Framework, risk allocation — that is, the allocation of your assets and liabilities among the three risk buckets — is more important than, and in fact must precede, both the selection of assets and the selection of investments and managers.

The Wealth Allocation Framework recognizes that there is no free lunch. Assets that provide safety and have the potential to hold their value in a market crash will not provide high return potential. Therefore, investments allocated to the Safety (personal) Risk Bucket will be selected to limit the loss of wealth but will probably yield below-market returns. Allocations to the Market Risk Bucket will provide risk-adjusted market returns, in accordance with the diversification principles of modern portfolio theory. Finally, allocations to the Aspirational Risk Bucket should be selected to yield above-market returns, but they will carry the risk of substantial loss of capital.

In this manner, each of the three core objectives of your wealth management strategy is assigned its own unique risk profile and requires its own carefully constructed portfolio: a 

 with the objective of stability for the long term; and an 

 to help you generate wealth to achieve your Aspirational Goals.

Here are a few ground rules to appropriate classification of assets and liabilities:

safety and is thus characterized by below-market risk

, then it belongs in the Safety, i.e., Protective, Bucket. These assets will likely provide below-market returns but should provide protection during market downturns. Examples are cash, short-duration Treasury Bonds, gold, and health insurance. Your home and its corresponding mortgage liability both end up in this bucket also. Finally, your human capital, or earnings potential, offset by any outstanding educational debt, also belongs in the Safety Bucket.

Assuming you are not overly concentrated in a stock, sector, country, or asset class

, most conventional equity (stocks) and fixed-income (bonds) securities fall into the Market Bucket, as long as they are sized appropriately as part of your diversification strategy. Alternative investments, such as a fund of hedge funds, commodity, private equity, venture, or real estate funds, may also belong in the Market Bucket if these investments are held for diversification purposes.

, it must also possess above-market risk and thus belongs in the Aspirational Bucket. Any concentrated or leveraged positions also belong in the Aspirational Bucket. Assets that fall into this bucket include early-stage “angel” or venture investments, as well as family-owned businesses that make up a significant portion of an individual’s net worth. In addition, the Aspirational Bucket includes executive stock options, concentrated stock positions, single-manager hedge funds, leveraged investments in real estate, and opportunistic call option instruments. Assets in this bucket are riskier than the market in general and include the possibility of catastrophic failure and loss of principal.

Working through the liability side of your personal balance sheet is similarly straightforward. All personal liabilities and debt should be allocated to the Safety Portfolio, where they reduce the size of your personal safety net. The only exceptions — non-recourse loans attached to specific investments — should be placed in the same buckets that hold those particular investments. In similar fashion, these loans will reduce the value of the corresponding asset.

Although it is not difficult to objectively assess the suitability of different assets and securities for each risk bucket, 

you must consider both the risk and return profile of the investment and the purpose it serves in your portfolio to determine the appropriate placement

. This is why different investors may sometimes place the same security in different buckets: placement depends on how the security is being used in the portfolio. As noted above, the three-bucket Wealth Allocation Framework provides no free lunch. As such, there are only three categories for your assets: low risk with low return; market risk with market return; and high return potential with high risk. There is, alas, no low-risk, high-return bucket!

The Wealth Allocation Framework is carefully designed to be logical, intuitive, and simple to understand. The key to risk allocation is not only understanding the particular characteristics of your various assets but also thinking carefully about the role they play in your portfolio. Within the Wealth Allocation Framework, this novel exercise in risk and resource management can be illuminating — and surprising.

Risk Allocation & Risk Buckets Organizing your Net Worth using the Wealth Allocation Framework

Introduction

Rather than focusing on the financial markets, it uses a novel Framework centered around you and your life goals. Done correctly it should lead to financial wellness, a healthy relationship with money and a deeper understanding of your investments and investment strategy.

This course seeks to organize, strengthen and enhance your financial life. 

The Framework

Mission & Framework -Video

Excerpt adapted from the Book: The Aspirational Investor

Read this excerpt from the Aspirational Investor

Wealth Allocation Framework

Safety

Stability

Aspirations

Framework

Summary of the Course

Let's Get Started

Let’s get started!

Goals

To have a happy life it is important to set realistic goals and add some serious dreaming! But, when it comes to developing a sound financial strategy, one must be able to differentiate between the two activities: setting realistic goals and serious dreaming.


We must distinguish between dreams and the current reality. However, it is both useful and inspiring to have a guiding principle for ones life and every day actions. We call this the North Star.


Many psychologists believe that: Happiness is the gap between your expectations and reality.

Setting Goals

Setting goals

Central Question

The North Star 

The North Star - A Guiding Principle For Your Life

Identify Your Goals

Prioritize Your Goals

Your goals and aspirations seem so personal, and perhaps so idiosyncratic, that they may defy any attempt to create a general frame- work that would logically organize them, let alone build a wealth management strategy to achieve them. But the work of one of the stars of academic psychology, Abraham Maslow, helps point the way...

Risk can be re-defined as failure to achieve your Goals.

Read this excerpt from The Aspirational Investor

A goal

 Essential Goals

 Important Goals

 Aspirational goals

More About Goals

Let's Prioritize

How Much Do You Need?

A common but hard to answer question is How much do I need to save for a goal that needs to be funded for the future. e.g. Buying a house or Retirement. Different financial calculators often provide a wide-range of answers to the same question. This is because although they all use the same methodology they often differ on at least two important inputs.

They choose a different estimated rate of return for your investments and a different discount factor to present value future cash flows. This leads to a sophisticated calculation where you can pretty much
arrive at any number you want.

Wealth is not an absolute number.
Rather 

Taming the markets to achieve your life’s goals.

Taming the markets to
achieve your life’s goals.