How Big Does Your Portfolio Have to Be Before It Should Look Different?

A reader writes in, asking:

“For the last several years I’ve been following a basic Boglehead strategy with a few index funds. How big does a portfolio have to be before it makes sense to start moving into other strategies?”

There are certain portfolio-related considerations that can become relevant as your wealth grows to a certain point. For example:

• If your portfolio starts to get to the point that estate taxes might be an issue (with the exemption currently at $5.34 million — or twice that if married) and your primary goal is leaving money to heirs rather than funding your retirement, purchasing life insurance as an investment can make sense, or
• If you have a larger, mostly taxable, 7-figure portfolio and a desire to be hands-on, individual stocks can make sense for the large-cap part of the portfolio — not with the idea of picking stocks that will outperform, but rather with the idea of creating a portfolio that roughly replicates the overall large-cap part of the market, while having expenses of zero (no expense ratios and no commissions) and having the ability to tax-loss harvest very aggressively due to having many unique holdings.

But, the truth is, most investors’ portfolios never reach those points — or even come close.

In addition, the basic principles of diversifying and keeping costs low remain applicable regardless of portfolio size.

As a result, for most people, it’s not exactly portfolio size that causes a need for a significant change to the portfolio. Instead, it’s usually a change in life/career stage that dictates major changes. That is, once the primary objective for the portfolio changes from an accumulation goal (i.e., accumulating assets while not exceeding your tolerance for volatility) to a spending related goal (e.g., satisfying $X of spending each year), the ideal tools for the job change somewhat.

Specifically, as you near retirement, it can make a lot of sense to start shifting toward a liability-matching strategy with a portion of the portfolio — creating a “safe floor of income” with things like Social Security, annuities, or TIPS. As author/advisor Bill Bernstein puts it, “If you’ve won the game, why keep playing it?”

Of course, portfolio size is a factor in determining when you make the shift from living off of work income to living off of the portfolio, but it’s only one of several factors (including ability to continue work, interest in continuing work, anticipated level of spending per year, and anticipated level of non-portfolio income per year).