MML #056: How to Build Your Investment Portfolio With Purpose

Last week, I walked you through the foundational work that comes before any investment decisions: designing your retirement life, calculating expenses, mapping stable income, and identifying the gap your portfolio needs to fill.

I promised we'd get more specific about what actually goes into that portfolio.

And while I intend to deliver on that promise, we're not starting with "buy this fund" or "allocate X% to stocks."

We're starting with two questions most attorneys never separate clearly: How much risk can you afford to take? And how much risk can you stomach?

Although related, these are two very different questions. 

Risk Capacity vs. Risk Tolerance

Risk tolerance is emotional. It's about your feelings around investing.

Those risk tolerance questionnaires ask things like:

• "If the market dropped 25% tomorrow, would you sell everything, do nothing, or buy more?"
• "Would you take investment advice from a coworker?"
• "How would you feel watching your account balance drop by six figures?"

Your answers reveal your psychological comfort with volatility. And this matters—because the best investment strategy on paper is worthless if you panic and bail out during a downturn. But we’re human..

Risk capacity on the other hand is mathematical. It's about measurable factors that determine how much risk you can actually afford to take:

• Your time horizon (are you retiring in 2 years or 20?)
• Your liquidity needs (how much cash do you need accessible?)
• Your income gap (remember last week's calculation?)
• Your stable income sources

You might have high risk capacity but low risk tolerance. Or the reverse.

A 45-year-old attorney with a pension and 20 years until retirement has significant risk capacity—time and stable income create room for market volatility. But if watching account values fluctuate makes them lose sleep? Their risk tolerance might be much lower.

The portfolio that works is the one that addresses both.

The Three Buckets Strategy

Before we can determine your investment allocation, we need to answer a critical question: What would you do if the market plummeted tomorrow?

Not theoretically. Practically.

This is where cash positioning comes in.

I structure portfolios using three time-based buckets:

Bucket 1 (1-2 years): Cash and cash equivalents. This covers your immediate income needs. If the market crashes in January you're not forced to sell investments at a loss to pay your mortgage in February.

Bucket 2 (2-7 years): More conservative investments. Bonds, stable income-producing assets. This bucket refills Bucket 1 as needed.

Bucket 3 (7+ years): Growth investments. Stocks, equities. Money you won't need to touch for at least seven years.

Why these specific timeframes?

They align with historical market behavior. Markets have always recovered from downturns given enough time. But "enough time" isn't always six months or even two years—it could be significantly longer, which is why we have that 3rd longer-term bucket. 

This structure means you minimize needing to sell stocks at the worst possible moment. You give yourself the best chance to ride out volatility because you're not dependent on those growth investments for immediate income.

What Growth Rate Do You Actually Need?

Remember last week's exercise? You calculated your income gap—the amount your portfolio needs to generate annually.

Now we need to translate that into a required growth rate.

If you have a $1 million portfolio and need $40,000 per year, that's a 4% annual requirement.

If you need $70,000 per year from that same portfolio? That's 7%.

This number matters enormously.

Attorneys sometimes make the mistake that they need aggressive growth when their actual plan requires nothing of the sort.

Don't Miss the Forest for the Trees

Now, I have strong opinions about the mechanics of investing. I favor lower-cost, more passive investments matched with a tactical asset allocation and tax planning approach. I can debate the merits of ETFs versus mutual funds, discuss bond ladders versus bond funds, argue about individual stocks versus index funds.

These discussions are interesting. They're even important.

But the problem that emerges at times is attorneys spend hours researching the perfect investment vehicle while completely missing the bigger boat.

They never calculated their actual savings rate. They never worked through their true retirement expenses. They never mapped their income gap. They're optimizing for a 0.15% difference in expense ratios while overlooking whether they're saving enough in the first place.

A boring investment strategy with thoughtful planning wins over the best investment strategy that misses the mark. Every time.

It's like debating the perfect running shoes while never actually training for the race.

Get the foundation right first—the life design, the expense calculation, the income mapping, the required growth rate. Then we can have intelligent conversations about implementation details.

The Process We Actually Follow at First Light Wealth

This is the exact process I go through with every client before we touch a single investment:

1. Calculate the required growth rate based on their income gap
2. Assess their risk capacity (time horizon, liquidity needs, stable income)
3. Evaluate their risk tolerance (psychological comfort with volatility)
4. Structure the three-bucket cash position
5. Design an allocation that fits all of these factors

Only then do we start talking about specific investments.

When Less Risk Is the Better Strategy

Sometimes the investment with the highest expected rate of return isn’t always the best advice. 

Let’s say an attorney has significant assets, qualifies as an accredited investor, and has high risk capacity based on their timeline and pension. On paper, they could handle an aggressive portfolio.

But their financial plan shows that a 4% annual return easily covers their needs. A conservative 60/40 portfolio historically delivers that with far less volatility than an 80/20 allocation.

Which strategy makes more sense?

The conservative one. Every time.

Not because they can't afford more risk. Because they don't need it.

Why subject yourself to stomach-churning volatility and sleepless nights during market downturns when a more stable approach achieves your goals just as reliably?

Just because you're an accredited investor doesn't mean you should invest in illiquid real estate investment trusts, private equity deals, or whatever exotic offering comes across your desk.

You don't need to "reach" for returns through speculative strategies if your plan doesn't require it.

The most sophisticated investment strategy isn't the most complex one. It's the one calibrated precisely to what you need—no more, no less.

The Allocation Follows the Math

Once we have all this information—required growth rate, risk capacity, risk tolerance, cash positioning—we can look at historical market data and build an allocation that fits.

Maybe that's 70/30 stocks to bonds. Maybe it's 50/50. Maybe it's something else entirely.

But it's not arbitrary. It's not based on what's popular or what some magazine article recommended for "people in their 60s."

It's based on your specific situation.

And here's the crucial part: The plan is only as good as your commitment to stick with it and make small adjustments along the way.

This is why I meet with clients twice per year at very strategic times—typically in the Fall for year-end or tax planning and Spring for investment and cashflow review . With plenty of check-ins in between.

Markets shift. Life changes. Tax laws evolve. A static plan from five years ago most likely isn't serving you well today.

The Investment Strategy Follows the Plan

I'll say it again because it's the foundation of everything: The investment strategy follows the plan, not the other way around.

You don't build a portfolio and hope it funds your retirement.

You design your retirement, calculate what it requires, and build a portfolio specifically to deliver that.

When you approach it this way, those hot investment tips and fear-of-missing-out moments lose their power. You're not wondering if you should chase the latest trend because you already know exactly what your portfolio needs to do.

And you know whether chasing that trend helps or hurts that goal.

That clarity is what allows you to actually enjoy retirement instead of constantly second-guessing your investment decisions.