WMCP key terms

A planning process that begins with the client's specific life objectives, assigns a cost and timeline to each, and then builds saving and investment strategies designed to fund those objectives in priority order.

The present value of a person's expected future earnings and savings from work. It is usually the largest asset of a younger client and shrinks as it is gradually converted into financial capital.

The value of a client's accumulated investable assets, including savings, retirement accounts, and portfolios. Unlike human capital, it can be spent, pledged, or transferred at any time.

Ranking a client's objectives by importance and urgency, usually as essential needs, important wants, and aspirational desires, so that limited resources are committed to the most critical goals first.

The length of time before funds are needed for a goal. It determines how much short-term volatility a portfolio can absorb and how much equity or illiquid exposure is appropriate.

A client's objective financial ability to absorb a shortfall or market loss without abandoning important goals. It depends on assets, income stability, time horizon, and the size of goals relative to resources.

A client's emotional willingness to accept investment volatility and the possibility of loss. It is assessed through discussion and questionnaires and can differ sharply from actual financial capacity to take risk.

The present value of a client's assets divided by the present value of the goals those assets must support. A result below one signals a gap requiring more saving, more risk, or reduced goals.

A technique that runs thousands of randomized market and longevity scenarios to estimate the probability a plan will meet its goals. The output is a likelihood of success, not a guarantee.

Splitting a portfolio into separate sub-portfolios, each matched to one goal's time horizon and risk profile, instead of managing a single undifferentiated allocation for the whole balance sheet.

The danger that rising prices erode the purchasing power of a client's assets faster than the portfolio grows, so money available at the goal date buys less than originally planned.

The risk that a client lives longer than planned and outlives the assets earmarked for retirement income. It increases with rising life expectancy and makes guaranteed income sources more valuable.

The risk that weak investment returns arrive early in the withdrawal phase, when the portfolio is largest, permanently damaging the plan even if average returns later recover.

A preset rule that adjusts withdrawals for market performance and inflation, such as trimming spending after a down year, to lower the chance of depleting a portfolio over a long retirement.

The set of portfolios offering the highest expected return for each level of risk, or the lowest risk for each level of expected return, given a specific set of capital market assumptions.

A mathematical process that combines expected returns, standard deviations, and correlations to derive portfolio weights on the efficient frontier. Output is highly sensitive to the estimates used as inputs.

A measure from -1 to +1 of how closely two assets' returns move together. Low or negative correlation among holdings reduces portfolio volatility without necessarily sacrificing expected return.

Spreading capital across assets, sectors, and markets whose returns do not move in lockstep, so that any single loss has a limited effect on total portfolio value.

Market-wide risk that diversification cannot remove, such as recessions, interest-rate shifts, or geopolitical shocks. Investors expect to be paid a return premium for bearing it.

A model stating that an asset's expected return equals the risk-free rate plus a premium for its sensitivity to the market portfolio. It underlies beta-based estimates of required return and cost of capital.

A risk-adjusted performance measure equal to excess return above the risk-free rate divided by standard deviation. Higher values indicate more return earned per unit of total volatility accepted.

A statistical measure of how widely returns vary around their average, commonly used as the proxy for total investment risk. Larger values indicate a wider range of possible outcomes.

Forward-looking estimates of expected returns, volatility, and correlations for each asset class, used as inputs to optimization and Monte Carlo work. They are the most influential judgment in portfolio design.

Periodically buying or selling to restore a portfolio to its target weights after market movements. It controls risk drift and enforces disciplined selling of winners, but can trigger taxable gains in taxable accounts.

Placing tax-inefficient assets, such as taxable bonds, in tax-deferred accounts and tax-efficient assets, such as broad equity index funds, in taxable accounts to improve after-tax outcomes.

Deliberately tilting a portfolio toward return drivers such as value, size, momentum, quality, and low volatility, based on evidence that these traits have earned premiums over long periods.

Excess coverage that sits above auto, home, and other liability policies and pays claims beyond those limits. It shields accumulated wealth from lawsuits at low cost relative to the exposure.

Arranging assets, legal documents, and beneficiary designations so wealth passes to intended recipients with minimal tax, delay, and administrative friction during life and at death.

A tax rule that resets the cost basis of appreciated assets to fair market value at the owner's death, eliminating capital gains tax on appreciation accrued during the owner's lifetime.

The amount one person may give another in a year without consuming lifetime gift and estate tax exemption or filing a gift tax return. Transfers to a citizen spouse are unlimited.

A trust that owns a life insurance policy and is drafted and administered so the death benefit stays outside the insured's taxable estate, keeping the proceeds available for heirs or liquidity needs.

Moving money from a traditional IRA or plan into a Roth account by paying income tax on the amount converted now, in exchange for tax-free growth and withdrawals later and no lifetime required distributions.

A holding so large relative to the portfolio, often employer stock or a family business interest, that the client's wealth depends heavily on one company's fortunes and carries undiversified risk.

Preparing to transfer a business's ownership and management through sale, family transfer, or buy-sell agreement, coordinated with estate and income tax planning and funded by insurance or outside financing.

Coverage that pays for extended custodial care such as nursing home or home health services, protecting a portfolio from the potentially severe cost of a long period of dependency.

Using insurance, titling techniques, legal entities, and exempt assets to shield wealth from creditors and liability claims, ideally put in place long before any claim arises.

An irrevocable split-interest trust that pays the donor or named beneficiaries income for life or a term of years, then gives what remains to charity, producing a partial deduction and removing assets from the estate.