The Wealth Stages Model
Shift your investment strategy between accumulation and preservation phases
The Wealth Stages Model divides your investing life into two primary phases: the Wealth Accumulation Stage and the Wealth Preservation Stage. During accumulation, when you are working, saving, and adding new money to your investments, Collins recommends an aggressive allocation of 100% stocks through VTSAX. The rationale is that during this phase, market drops are actually beneficial because they let you buy more shares at lower prices, and you have decades for compounding to work.
During the Wealth Preservation Stage, when earned income slows or ends and you begin living on your investments, Collins recommends adding bonds (VBTLX) to the portfolio. His personal allocation in semi-retirement is approximately 75% stocks, 20% bonds, and 5% cash. The bonds serve three purposes: they smooth out stock market volatility, provide income through interest payments, and act as a deflation hedge.
Critically, Collins argues that these stages are not tied to age in the traditional sense. They are tied to your life circumstances. You might shift between stages multiple times as you move in and out of employment, take sabbaticals, start businesses, or return to work after periods of retirement. The traditional advisor formula of 'subtract your age from 100 to determine your stock allocation' is dismissed as overly simplistic and often too conservative.
- Investment stages should be tied to life circumstances, not age
- During accumulation, 100% stocks provides the highest long-term returns
- During preservation, adding 20-25% bonds smooths volatility and provides income
- Market drops during accumulation are buying opportunities, not threats
- You may shift between stages multiple times throughout your life
- Bonds serve as a deflation hedge while stocks serve as an inflation hedge
- Rebalancing once a year is sufficient; more frequent rebalancing adds no proven benefit
- Identify your current stageAre you working, earning income, and adding money to your investments? You are in the Wealth Accumulation Stage. Are you no longer earning, living off your investments, or transitioning out of full-time work? You are entering the Wealth Preservation Stage. Be honest about where you are.
- Set your allocation based on your stageDuring accumulation, hold 100% stocks in VTSAX (or up to 75-90% stocks with 10-25% bonds if you want a slightly smoother ride with potentially similar returns). During preservation, shift to approximately 75% stocks (VTSAX) and 20-25% bonds (VBTLX) with a small cash cushion.
- Manage the transition between stagesFor the smoothest transition, begin shifting into your bond allocation 5-10 years before you fully retire, especially if you have a fixed retirement date. If you are flexible on timing and risk-tolerant, you can stay fully in stocks until you make the change, accepting that a market downturn might push your retirement date back slightly.
- Rebalance annuallyOnce a year, check whether your allocation has drifted from your target due to market movements. If stocks have outperformed, sell some stocks and buy bonds to return to your target. If bonds have outperformed, do the reverse. Do this in tax-advantaged accounts when possible to avoid capital gains taxes. Collins rebalances on his wife's birthday as a random, easy-to-remember date.
After retiring in 2011, Collins and his wife settled into a portfolio of approximately 75% VTSAX, 20% VBTLX, and 5% cash in their local bank. This allocation acknowledges that even in retirement, with potentially 20-30 years of investing ahead, stocks remain essential for growth and inflation protection. The bonds smooth the ride and the cash covers daily needs.
Collins experienced multiple shifts between accumulation and preservation throughout his own career. He quit jobs, took sabbaticals, started businesses, and returned to work multiple times over 34 years. During one period when neither he nor his wife was working, their net worth actually grew because their investments were compounding. This personal experience of fluid life stages informed his rejection of age-based allocation formulas in favor of a model based on actual life circumstances.