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For many investors, financial independence is the ultimate goal. It is the point where your assets generate enough income to cover your living expenses, giving you the freedom to work on your own terms or choose to retire completely.
However, reaching this milestone should also prompt a critical shift in your investment strategy. While the path to financial independence often involves seeking higher returns to accelerate wealth accumulation, continuing to assume too much risk once you have achieved your goal can be detrimental to your long-term financial security.
Before reaching your financial independence goal, your primary focus as an investor should be to save and invest in a way that grows your portfolio over time. This stage, often known as the "accumulation phase," emphasizes investments with the potential for higher returns, such as stocks, real estate, cryptocurrencies, and other growth-oriented assets.
Also, during this phase short-term volatility is less concerning because you are not yet dependent on your portfolio for income, and the volatility of growth investments is often smoothed out over time. Market downturns are seen as buying opportunities, allowing you to purchase assets at a discount and wait patiently for a recovery.
But once you achieve financial independence, the stakes change. At this point, your goal should shift from accumulation to preservation. You no longer need to take on significant risks to achieve a lofty financial target. Instead, your focus should be on maintaining the wealth you have accumulated above all else. This does not mean abandoning growth entirely, but it does mean being more selective about the risks you take.
For example, while a 40-year-old in the accumulation phase of their life might be comfortable with 90% of their portfolio in stocks, a financially independent person of the same age should consider reducing that exposure considerably. And the danger lies not just in the size of the losses, but in the timing. A market downturn just as you are about to start drawing from your portfolio can have a far more damaging effect on your financial stability, especially if it were to occur while you are still working and adding to your savings.
This is due to what is known as "sequence of returns risk." This refers to the order in which you experience positive and negative returns, and it is especially important once you are withdrawing funds from your portfolio. When you are still in the accumulation phase, a market downturn can be followed by a recovery, and over time, the ups and downs even out.
Imagine if that same 40-year-old managed to save a $2 million nest egg with plans to withdraw 4% annually—or $80,000 per year—to cover living expenses. If the stock market were to suffer a 20% correction that same year, it would reduce that portfolio by as much as $400,000. This would also mean that this person would be withdrawing a much larger percentage of their assets to maintain the same $80,000 per year lifestyle, which would only accelerate the depletion of their portfolio and make it harder for those investments to fully recover when markets rebound.
If you happen to encounter a significant downturn soon after reaching your financial independence point, it can permanently impact your portfolio, as you would be withdrawing funds to cover living expenses simultaneously while the markets tumble. This is why shifting to a more conservative allocation after reaching financial independence is so critical.
Ironically, a bull market (when stock prices are rising, and investor optimism is high) can be the perfect time to make a shift into more stable, income-generating investments. When the market is up and things are going well, your portfolio is likely at (or near) its peak. This serves as the perfect time to lock in gains and reduce risk, without sacrificing potential growth.
That said, while preserving your wealth is critical, it is important to remember that some growth is still necessary to keep pace with inflation and longevity. Inflation erodes the purchasing power of your money over time. And for a person who has achieved financial independence a decade or more before their mid-60s, it is important to make sure that your portfolio strikes a balance between stability and growth.
Consider how a basketball or football coach manages play-calling in a game where they have a significant lead by halftime. If the team is up by 30 points at the half, the approach naturally becomes more conservative. That does not mean they stop attempting to score altogether, but the need to take the same aggressive risks that helped build the early lead is unnecessary.
Instead, the coach focuses on protecting that lead, avoiding injury, minimizing mistakes, and ensuring a steady, controlled game. They might even prioritize defense to maintain the advantage. Managing your finances is no different.
One of the most challenging aspects of achieving financial independence is the psychological shift required to transition from a growth mindset to one of preservation. For years, you have been focused on accumulating as much as possible, chasing high returns and taking great risks to reach your financial goals faster. It can be difficult to let go of that mentality, especially when markets are booming, and there is a temptation to chase after even greater gains.
But at this stage, the risk of losing what you have built far outweighs the potential reward of trying to grow your wealth even further. The peace of mind that comes from knowing your assets are secure and capable of supporting your lifestyle is far more valuable than squeezing out an extra percentage point in returns.
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