Only when the stock market goes down do people start to wonder whether they have too much exposure to stocks (equities). Questions arise: Should I cut back? Should I buy the dip? What’s the appropriate allocation to stocks right now?
While the answer depends on many variables—your risk tolerance, age, net worth, current asset allocation, and financial goals—figuring out the right amount of stock exposure doesn’t have to be complicated.
A Simple Stock Exposure Litmus Test
If you’re a working adult, here’s an easy way to determine whether your stock exposure is appropriate:
Calculate your paper losses during the latest market correction and divide that number by your current monthly income.
This gives you a rough estimate of how many months you’d have to work to make up for your stock market losses, assuming no rebound. It is part of my SEER formula that helps determine your true risk tolerance.
Stock Market Exposure Example:
Let’s say you have a $1 million portfolio, fully invested in the S&P 500. If the market corrects by 20%, you’ve lost $200,000. If you make $15,000 a month, you’d need to work 13.4 months to make up for the loss.
If the idea of working 13.4 extra months doesn’t faze you—maybe because you’re under 45, enjoy your job, or have plenty of other assets—then your stock exposure might be just right. You might even want to invest more.
But if the thought of working over a year just to recover your losses is depressing, your exposure to equities might be too high. Consider reducing it and reallocating to more stable investments like Treasury bonds or real estate.
A Real Case Study: Way Overexposed To Stocks
Here’s a real example I came across: A couple in their mid-50s with a $6.5 million net worth at the beginning of the year, consisting of $6 million in stocks and $500,000 in real estate. They spend no more than $100,000 a year.
In the first four months of 2025, they lost $1 million from their stock portfolio, which dropped to $5 million. With a maximum monthly spend of $8,333 (or ~$11,000 gross), they effectively lost 90 months of gross work income—that’s 7.5 years of working just to recover their losses.
For a couple in their mid-50s, losing that much time and money is unacceptable. They already have enough to live on comfortably. A 4% return on $6 million in Treasury bonds yields $240,000 a year risk-free. That’s twice their spending needs with virtually no risk.
This couple is either chasing returns out of habit, unaware of their true risk tolerance, or simply never received thoughtful financial guidance.
As I consult with more readers as part of my Millionaire Milestones book promotion, I realize everybody has a financial blindspot that needs optimizing.
Time Is the Best Measure of Stock Exposure
Why do we invest? Two main reasons:
- To make money to buy things and experiences.
- To buy time—so we don’t have to work forever at a job we dislike.
Between the two, time is far more valuable. Your goal shouldn’t be to die with the most money, but to maximize your freedom and time while you’re still healthy enough to enjoy it.
Sure, you could compare your losses to material things. For example, if you’re a car enthusiast and your $2 million portfolio drops by $400,000, that’s four $100,000 dream cars gone. But measuring losses in terms of time is a far more rational and powerful approach.
As you get older, this becomes even more true—because you simply have less time left.
Here’s a table that highlights a Risk Tolerance Multiple as measured in terms of working months. Your risk tolerance will vary. You can construct the rest of the portfolio with bonds, real estate, or other less volatile assets.
My Personal Perspective on Time and Stock Exposure
Since I was 13, I’ve valued time more than most. A friend of mine tragically passed away at 15 in a car accident. That event deeply shaped how I approach life and finances.
I studied hard, landed a high-paying job in finance, and saved aggressively to reach financial independence at age 34. My goal was to retire by 40, but I left at 34 after negotiating a severance that covered five to six years of living expenses. I’ve acted congruently with how I value time – it is way more important than money.
Since retiring in 2012, I’ve kept my stock exposure to 25%–35% of my net worth. Why? Because I’m not willing to lose more than 18 months of income during the average market downturn, which tends to happen every three to five years. That’s my threshold. I never want to go back to full-time work for somebody else, especially now that I have young children.
They say once you’ve won the game, stop playing. Yet here I am still investing in risk assets, driven by inflation, some greed, and the desire to take care of my family.
Adjusting Stock Exposure by Time Willing to Work
In the earlier example, I advised the couple with $6 million in stocks to either reduce their exposure or increase their spending. Losing $1 million in a downturn equates to about 90 months of work income, based on their $11,000/month gross income.
If they’d be more comfortable losing the equivalent of just 30 months of income, they should limit their stock exposure to roughly $2 million. That way, in a 16.7% correction, they’d lose no more than $330,000.
Alternatively, they could justify their $6 million stock exposure by increasing their monthly income to $33,333, or about $400,000 a year. But more easily, boost their after-tax spending from $8,333 ($11,000 gross), to about $25,000 ($33,000 gross). That way, a $1 million loss represents just 30 months of work or spending.
Of course, it’s financially safer to boost income than to boost spending. But these are the levers you can pull—income, spending, and asset allocation—to align your portfolio with your willingness to lose time.
If you have a $6.5 million net worth and only spend $100,000 a year, you’re extremely conservative. The 4% rule suggests you could safely spend up to $260,000 a year, which still gives you plenty of buffer. Hence, this couple should live it up more or give more money away.
Time Is the Greatest Opportunity Cost
I hope this framework helps you rethink your stock exposure. It’s not about finding a perfect allocation. It’s about understanding your opportunity cost of time and aligning your investments with your goals.
Stocks will always feel like funny money to me until they’re sold and used for something meaningful. That’s when their value is finally realized.
If this recent downturn has you depressed because of the time you’ve lost, your exposure is likely too high. But if you’re unfazed and even excited to buy more, then your allocation might be just right—or even too low.
Readers, how do you determine your appropriate amount of stock exposure? How many months of work income are you willing to lose to make up for your potential losses?
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Financial Samurai began in 2009 and is one of the leading independently-owned personal finance sites today. Since its inception, over 100 million people have visited Financial Samurai to gain financial freedom sooner. Sign up for my free weekly newsletter here.
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