Overview: How do you know when you have enough? It's a different answer for everyone, but not knowing it can put your investments in jeopardy.

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Kurt Vonnegut related this story about fellow author Joseph Heller. The two were at a billionaire’s party on Shelter Island. Vonnegut asked Heller how it made him feel that the host may have made more money in one day than Catch-22 (Heller’s most famous work) did in its entire run. Heller replied that he had something the host could never have, “The knowledge that I’ve got enough.”

 

Unless one inherits wealth, the most common way to amass significant wealth is by taking lots of risk. Being a risk taker who has known success can give you confidence in your ability to take risk. That confidence often creates the willingness to take risks. In addition, your wealth gives you the ability to take risk.

 

However, the ability and willingness to take risk are only two of the three criteria for an investment policy. There is a third (often overlooked) criterion — the need to take risk. A great irony is that the very people with the most ability and willingness to take risk have the least need to take it.

 

Those with sufficient wealth to meet all their needs should consider that the strategy to get rich is entirely different than the strategy to stay rich. To get rich, you take risks. To stay rich, however, you should minimize risk — diversify the risks you take and avoid spending too much.

When deciding on the appropriate asset allocation, you should consider your marginal utility of wealth — how much any potential incremental wealth is worth relative to the risk that must be accepted to achieve a greater expected return. While more money is always better than less, most people achieve a very comfortable lifestyle at some point. After that, taking on incremental risk to achieve a higher net worth no longer makes sense. The potential damage of an unexpected negative outcome far exceeds the potential benefit gained from incremental wealth.