Sam Plotkin
October 14, 2026
Believe it or not, it’s rare for us to get asked how we manage our investors’ money. Sure, we’re often talking about risk tolerance and asset allocation in the context of whether we need to rebalance a portfolio or not, but what are we rebalancing to? How do we come up with the investment proposal in the first place?
Our investment management strategy is based on two concepts: Modern Portfolio Theory and Functional Asset Allocation. The former was developed in 1952 and is, in fact, not that modern at all. The primary tenet is that you create a diversified portfolio that maximizes risk-adjusted returns (higher returns with lower volatility). Or to put it in layman’s terms: “don’t put all your eggs in one basket!” The strategy, in and of itself, exists in a vacuum: it is not tailored to an individual’s needs, preferences, or time horizon. To address these limitations, we use Functional Asset Allocation.
Functional asset allocation gives different jobs to different aspects of a portfolio. Take a hypothetical client who’s 60 years old, has $3,000,000 in investable assets, and just retired. We might determine that they need $100,000 to live on for the next 10 years until they collect Social Security. The remainder of the portfolio is either going to be used very late in life or will eventually become kids’ money. Here’s how we would construct the portfolio:
- Job 1: Stability – $1,000,000 ($100,000 per year for 10 years) is spending money. We would put this portion into low-risk bonds so that when it’s time to withdraw the money for spending, it is definitely there.
- Job 2 – Long-term Growth: The remaining $2,000,000 of the portfolio isn’t earmarked for any near-term spending need, and therefore, it can be used for long-term growth. We would likely invest this portion of the portfolio in a diversified mix of equities, which historically have grown at 10% per year.
The overall allocation of this portfolio is ⅔ equities and ⅓ fixed income. This was determined by figuring out the functional needs of the investor, not through a survey about perceived risk.
Oftentimes, the rules around certain types of accounts dictate the function that they serve. Take a 40-year-old client who has $500,000 in their 401(k). According to IRS rules, that 401(k) account can’t be spent (without severe penalty) for 20 years. Put differently, the IRS has decided for us that this account’s job is long-term growth, and in most cases, it would make sense to invest it at least somewhat aggressively.
Lastly, there are tax considerations around the investment decisions that we make. A Roth IRA account is tax-free, whereas a traditional IRA account is only tax-deferred: when money is withdrawn, it becomes taxable income. All things being equal, if you were given the choice, which one would you want to grow faster? If the Traditional IRA doubles in size, so does the associated tax liability. If the Roth IRA doubles in size, the tax liability remains $0. For this reason, we prefer to put high growth investments (equities) into Roth IRAs and low growth investments (fixed income or bonds) in Traditional IRAs.
In all of these examples, Modern Portfolio Theory plays a role because all of the people we work with receive a diversified portfolio. However, we use the principles of Functional Asset Allocation to plan out portfolio distributions and determine what kinds of investments go into what kind of account. As Wendy likes to say, managing a portfolio is like solving a Rubik’s Cube. The different sides include: diversification, risk tolerance, tax management, withdrawal requirements, and an investor’s personal preferences.