The "in-between" goal
How to invest together for what's still taking shape.
Doug’s back with his CFP® hat on to dive into the mechanics of a common issue facing our client couples. Just remember that everyone’s financial situation is different, and you should consult with a professional for advice tailored to your specific needs. Take it away, D!
A big part of my job is investing money for our clients. But before we put a single dollar to work, we identify the goals we’re investing toward.
Investing without a goal is like charting a course without a destination. You’ll end up somewhere, but maybe not the place you had in mind.
Short-term goals are clear to solve for. If you need money for something within the next four years, that money belongs in a high-yield savings account or in cash equivalents like T-bills. Risk is off the table, because you need the money soon.
Long-term goals are straightforward, too. The more time you have on your side, the more risk you can afford to take. For example, a 28-year-old individual saving for retirement can load up on stocks and ride out whatever the market throws at them. Meanwhile, a 60-year-old person on the cusp of retirement should want to find calmer waters with less risk and more certainty. They also might want fewer boating analogies in this newsletter. Yar!
Some goals don’t fit neatly into either category. They’re too far off to leave sitting in cash, where years of potential growth could be wasted, but they’re too close to go all-in on the stock market and worry that a 20-percent decline could derail everything.
I call this the in-between goal, and it’s more complex than the others. In this scenario, you might be certain you want the goal but are fuzzy about the details. How much will it cost? You don’t exactly know. When will it happen? Sometime soon-ish. The conviction is real, but nothing else really is.
Let’s look at some goals that live in the gray area.
Buying a new house. You know you want one someday, but you may not know the town, the year, or whether the down payment is going to be $100,000 or $200,000. On top of that, rates could move, your job could change, and the housing market you’re buying into could flip from a buyer’s to a seller’s. Who knows.
Taking a W-2 career pause. You’ve been working 20 years straight since college and you’re starting to burn out. You’d love the opportunity to step away, maybe raise your kids during their pivotal years or start a new business of your own. But you’re not doing it next year—you need time to build runway first. Your account balance is your timeline. Every dollar of growth moves your exit date closer, and every drawdown pushes it farther away. Losing 20 percent of this money won’t just hurt; it could cost you an extra year at a job you’re trying to escape.
Helping your parents. Their health is becoming more uncertain, and you want to be able to help when the time comes. But you don’t exactly know how much financial assistance you want to give. Maybe you want to cover their in-home care or help them move them somewhere closer to you. This goal carries a weight the other two don’t, because the deadline isn’t yours to set. All you can do is be ready enough when the call comes to step up. Not easy.
In Money Together, we write about the difference between risk capacity and risk tolerance. Capacity is math. It’s what your finances can absorb. Tolerance, however, is emotional. It’s what lets you sleep at night and stick to the plan. When you operate as a financial team, your capacity is usually shared, but your tolerance isn’t. Same balance sheet with two different stomachs.
You can manage your differences easier for long-term goals, because time can smooth them over. For example, if one of you wants 90 percent stocks and the other wants something closer to 70 percent over a 20-year period, you’ll both probably be fine, and you have decades to adjust if things change.
The in-between goal doesn’t offer that cushion. You’re living in the gray area of your differences, and one partner’s risk tolerance should constrain you. For example, if a 15-percent drop in the market would cause your spouse to spiral, it doesn’t matter what your financial plan says you can afford—your financial plan doesn’t sleep next to you at night.
So, how do you choose an allocation for a blurry goal? Try these three steps.
Step One: Focus on the drawdown instead of your return.
Don’t start by asking, “What kind of return do we want?” Everyone wants the highest return possible.
Instead, start with “What loss would make one of us panic and blow up the plan?”
Each of you should answer independently. Compare them and use the more conservative number. That’s your household risk tolerance for this goal. The partner with less tolerance sets the tone, because the plan only works if both people will stay in it.
Step Two: Check your drawdown number against real data.
Most couples lack some context for their number, so let’s fix that with data.
Since 1980, the S&P 500’s average dip is about 14 percent, according to JPMorgan’s Guide to the Markets. That means that in a typical year, the market falls 14 percent from its high at some point. And yet, the index still finishes positive 75 percent of the time. So, scary drawdowns and positive annual returns usually show up together.
Understanding drawdown frequency really matters for this type of goal window. Per LPL Research, 10-percent corrections happen about once a year on average, while bear markets of 20 percent or more arrive roughly every 6-to-7 years (67! 67! 67!). So, while trying to accomplish a in-between goal, you’ll almost certainly catch at least one 10-percent market correction, and there’s a good chance you catch a full-blown bear market.
Mixing in some bonds may soften the blow of stock market drawdowns. Morningstar’s 150-year study found that historically, a 60/40 portfolio of stock and bonds experienced 45 percent less volatility than an all-stock portfolio across every major market crash.[1]
The main takeaway is that diversification is a highly effective seatbelt, but any time you’ve got money in the markets, you’re still taking on risk.
Step Three: Match your allocation to your tolerance.
Now, let’s match your drawdown number to a reasonable portfolio. Please keep in mind that I am painting with broad strokes, and that you should do your own research or consult with a financial professional about what’s right for your individual circumstances. Cool. Cool.
If you both think you could emotionally survive a temporary 20-percent drop, a 50/50 or 60/40 portfolio is defensible. But if 10 percent is all you can stomach, you should be moving closer to 30 percent stocks and 70 percent bonds and cash.
Why? Stocks drive both growth and drawdowns. The less downside you can stomach, the less stock you should own. It’s really that simple. If a 5-percent dip would have you breaking out in a cold sweat, most of your money belongs in cash and short-term bonds. And that’s fine— just own it, because missing some upside is a real cost, but it’s a cheaper cost than abandoning the plan at the bottom. Abandoning the plan at the bottom is one of the costliest investing mistakes people can make. So don’t do it.
Here’s one more idea for the blurriest of goals.
Split the money into two buckets. Think of it like this: even a fuzzy goal has one part you’re sure about. You know you’ll need a down payment, but you don’t know if it’s for a starter home or a forever home. You know you’ll need at least one year of financial runway to leave your job, but you don’t know if you’ll need two years.
So, consider funding a first bucket—the minimum floor—conservatively. You can then invest the second bucket—the stretch portion—with more risk. If markets cooperate, you’re able to reach for the higher end of your goal. If they don’t, you’re still protecting the floor.
Lastly, you can begin to de-risk on a schedule instead of a gut feeling. When the goal gets closer or clearer—like when you pick the town you want to live in or are ready to draft your resignation letter—shift more toward cash. Be sure to calendar it and stick to it. Feelings are the worst portfolio managers. Trust me.
The in-between goal isn’t a portfolio problem that gets more complicated because you’re in a relationship. It’s a couples’ problem with a portfolio attached to it. Allocating becomes the easy part once you’ve agreed on the losses you can both handle.
You won’t nail this perfectly. Nobody ever does, including me and Heather. What matters is having an answer you both chose, one that’s sized to the losses you can both stomach, and revisited at least once a year. That’s how an opaque, moving target can become a plan you’ll actually follow.
Have you thought about planning for your in-between goals? What are you doing to meet them? Let us know!
Welcome back to one of our favorite mini-series, where we take to social to ask how you’d spend money handed to you with no strings attached. This time, we’ve upped the ante by adding some zeroes. Let’s see what people said:
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The content shared in The Joint Account does not constitute financial, legal, or any other professional advice. Readers should consult with their respective professionals for specific advice tailored to their situation. The information contained in this post is general in nature and for informational purposes only. It should not be considered as investment advice or as a recommendation of any particular strategy or investment product. This post is not a solicitation or an offer to buy or sell any specific security. Bone Fide Wealth cannot guarantee the accuracy of information from third parties.
[1] But not always! In 2022, stocks and bonds fell together, causing a typical 60/40 portfolio to drop more than 20 percent peak-to-trough before finishing the year down about 16 percent. But that was the only time in 150 years that bonds provided no cushion during a significant stock decline.