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Module 5 · Lesson 20

Sizing and Boundaries

Setting a ceiling, a contribution method and a rebalancing boundary before any capital is committed.

Key principle

The boundaries are decided before the position exists, because they cannot be decided objectively after it does.

Lesson

Content

Three boundaries govern the reserve, and all three are set in advance. The ceiling is the maximum share of productive assets the position may represent. It is stated as a percentage, not a dollar figure, so it scales with the rest of the balance sheet. Households commonly express discomfort at small percentages; that discomfort is information about the appropriate size. The contribution method determines how capital enters. Scheduled, fixed-amount contributions remove timing decisions and the temptation to increase contributions after price appreciation. The framework prefers a schedule to discretion here for the same reason it prefers a written allocation rule. The rebalancing boundary determines what happens when the position exceeds the ceiling through appreciation. Without a stated boundary, a position that grows becomes progressively larger relative to everything else, and the household ends up with a concentration it never chose. A boundary states, in advance, that the excess is reduced back to the ceiling. Each boundary should be written with the date it was set. Boundaries written after a position has moved sharply in either direction reflect the move, not the household's judgement.

Illustration

Educational example(s)

An illustrative household writes: ceiling 4% of productive assets; contributions $75 per month regardless of price; if the position exceeds 6% of productive assets at any quarterly review, reduce it back to 4%; boundaries reviewed annually. Over a period of appreciation, the position reaches 6.8% and the household reduces it to 4%, redirecting the proceeds under the general allocation rule. Figures are illustrative only.

Examples are illustrative only. They are not forecasts and do not reflect any individual result.

Common mistake

Setting the ceiling as a dollar amount. As the rest of the balance sheet grows or shrinks, a fixed dollar ceiling silently changes the concentration it was meant to control.

Risk explanation

Rebalancing out of an appreciated position may create tax consequences that vary by jurisdiction and circumstance; this is a matter for a qualified tax professional. Rebalancing also does not protect against loss — a position reduced to its ceiling can still decline to zero. Scheduled contributions do not reduce risk of loss and do not ensure any outcome.

Do this

Action step(s)

Write your three boundaries with today's date, before any position exists or before adding to an existing one.

Reflection question

Would you write the same ceiling if the position had fallen 60% last month? If not, which figure reflects your actual judgement?

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How this applies by framework phase

The same material reads differently depending on what your capital needs to do next. You may be in more than one phase at a time.

Capital Building
Read this as a question about direction: which surplus, which income stream, and which asset should the next dollar move toward — and what would make that move durable rather than opportunistic?
Capital Conversion
Read this as a question about productivity: what is the capital you already own currently doing, what cash flow could it support, and what drag, liquidity or liability constraint has to be handled before it can do more?
Capital Preservation
Read this as a question about durability: what could force a sale at the wrong time, how much liquidity keeps that from happening, and how is purchasing power protected without abandoning growth entirely?
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