How We Build Investment Portfolios

At Incline Financial Planning, we believe in a clear, logical process for building and managing your wealth. Our approach is not a one-size-fits-all solution; it's a personalized journey that begins with a deep understanding of your unique financial life. We don't just build a portfolio—we build a plan.

Here is an overview of how we build an investment portfolio for our clients.

Step 1: The Financial Plan & The Bucket Strategy

Our entire investment portfolio building process starts with a financial plan. Knowing your goals and future income needs is the foundation of our strategy. Based on this plan, we organize your assets using a time-tested approach known as the Bucket Strategy. This method provides clarity and confidence by directly linking your investments to your income needs.

  • Bucket 1: The Short-Term Bucket (1 year): This is your financial safety net, holding cash or cash equivalents to cover all income needs for the next 12 months. It ensures you never have to sell a long-term asset during a market downturn to pay for daily living.

  • Bucket 2: The Mid-Term Bucket (Years 2–10)
    This bucket is designed to provide income for the intermediate years of retirement. The exact timeframe depends on your risk tolerance, but it generally covers your needs for about 5–8 years.

    • Conservative approach: Years 2–10 are held primarily in bonds.

    • Moderately aggressive approach: Years 2–6 are held in bonds, with the later years invested for growth.

    • Once we determine the income needed, we calculate the lump sum required—adjusting for inflation—and invest it in short to intermediate-term government and investment-grade bonds. This creates a stable buffer that helps protect against market volatility while ensuring your near- to mid-term income is secure.

  • Bucket 3: The Long-Term Bucket (7 to 10+ years): This is your long-term growth engine. It holds a globally diversified portfolio of stocks and other growth-oriented assets, designed to outpace inflation and grow your capital to replenish the other buckets over the long run.

Step 2: Annual Review and Rebalancing

The true power of this strategy lies in its dynamic, disciplined implementation. We conduct an annual review to ensure your portfolio remains aligned with your financial plan.

  • Look Forward: We begin each year by looking ahead at the income required from your portfolio.

  • Rebalance with a Purpose: We reallocate assets based on the Net Present Value (NPV) of your future income needs. This involves determining the lump sum required today to cover the income for your mid-term bucket, using the current yield from our bond portfolio as the discount rate. We then harvest gains from the long-term growth bucket to replenish the mid-term bucket, restoring it to its target duration.

  • Fund the Short-Term Bucket: Finally, we fund your "Now" bucket by transferring the necessary cash from your mid-term bucket.

This process provides the psychological fortitude to withstand market volatility, knowing your near- and mid-term income needs are secure while your remaining funds are invested for long-term growth.

Step 3: Choosing the Right Investments

Once we've determined the optimal allocation of stocks, bonds, and cash, we choose the specific investments to fill them. Our choices reflect a disciplined, research-driven philosophy focused on diversification and cost-efficiency. We primarily use indexed Exchange-Traded Funds (ETFs) with very low costs from leading providers like Vanguard, BlackRock's iShares, and State Street's SPDR.

  • Stock Portfolio: A Global Approach with a U.S. Tilt: We believe diversification is your shield. Our equity portfolio is globally diversified, with a slight tilt toward U.S. assets to mitigate currency risks. We also incorporate a dedicated real estate component to round out a fully diversified portfolio.

  • Bond Portfolio: Strategic, Short- to Intermediate-Term Focus: The purpose of our bond portfolio is to provide stability and enhance returns while limiting risk. We focus on the short- to intermediate-term side of the yield curve and tilt towards investment-grade corporate bonds to enhance returns. We also include a mix of global bonds from developed nations and inflation-protected bonds to safeguard your purchasing power.

Step 4: Tax-Aware Implementation

The final and most crucial step is to place these investments in the right accounts. It's not just about what you make, but what you keep after taxes. We take your personal tax situation into account to ensure your investments are receiving the most favorable tax treatment.

  • Location Matters: We strategically place assets in the accounts where they are most tax efficient. For example, bonds, which generate income taxed at your ordinary income rate, are generally better placed in tax-advantaged accounts (e.g., a Traditional IRA or 401k) to shield that income from annual taxation.

  • Tax-Efficient Withdrawals: We also consider the long-term plan for withdrawals. Knowing that funds from Roth accounts are tax-free, we typically use those for "last resort withdrawals" to maximize their compounding and growth. We prioritize withdrawing from taxable accounts first to utilize lower capital gains rates, followed by tax-deferred accounts. This disciplined sequence is designed to minimize your lifetime tax liability.

Every client's situation and goal is different, which is what puts the "personal" in personal finance. Our entire investment portfolio building process starts with a financial plan. Knowing your goals and future income needs allows us to build a tax-efficient portfolio designed uniquely for you.