I often get questions from readers who are approaching retirement with a relatively small nest egg and a big fear of sequence-of-returns risk: “How can I avoid a large drawdown in the early years of retirement?” Volatility targeting is one practical technique I use and recommend to help smooth drawdowns while keeping a meaningful allocation to growth assets. In this article I’ll walk you through what volatility targeting is, why it matters for a small retirement portfolio, and exactly how I implement it in a cost-aware, tax-aware way.
What is volatility targeting and why it helps retirees
Volatility targeting is a dynamic portfolio sizing rule: instead of keeping fixed percentage allocations (for example 60% stocks / 40% bonds), you adjust the exposure to the risky asset so that the portfolio’s expected or realized volatility stays near a predetermined target. When markets calm you increase exposure to stocks; when markets spike you reduce exposure. The goal is not to time returns, but to smooth realized volatility and reduce the probability of large early drawdowns that can cripple a small retirement balance.
For retirees with a small portfolio, drawdowns are particularly dangerous because withdrawals during a downturn permanently lower the base from which future gains compound. Volatility targeting reduces the size of those drawdowns and can improve the “sustainability” of withdrawals. It’s a pragmatic way to balance growth and protection without having to sell into panic or adopt an overly conservative static asset mix.
Core elements of a volatility-targeted strategy
Here are the components I use when I design a volatility-targeted plan for a retiree portfolio:
Simple rule I use (step-by-step)
My go-to volatility targeting rule for a small retirement portfolio is straightforward and implementable using a regular brokerage account and ETFs:
Example: Target volatility = 10%. Estimated equity vol = 20%. Equity allocation = 0.6 × (10/20) = 0.3 → 30% in equities, 70% in bonds. If equity vol drops to 12%, allocation = 0.6 × (10/12) ≈ 50% equities.
Practical implementation details
Here are the practical choices that make this work for a small retirement account:
Example allocation table
| Estimated Equity Volatility (annual) | Equity Allocation (target 10%, base weight 60%) | Bonds/Cash |
|---|---|---|
| 25% | 24% (0.6 × 10/25) | 76% |
| 20% | 30% | 70% |
| 15% | 40% | 60% |
| 12% | 50% | 50% |
| 8% | 75% (capped at 75% if you set max) | 25% |
Risks, pitfalls and how I mitigate them
Volatility targeting sounds attractive but it’s not a free lunch:
Measurement and monitoring
I use Portfolio Visualizer or a simple spreadsheet to compute rolling volatility and simulate the strategy before committing. If you’re comfortable with Python, a short script using pandas can compute a 60-day rolling std and apply the allocation rule. For non-programmers, brokers like Vanguard, Schwab, and Fidelity allow easy ETF trading and most portfolio trackers can help visualize allocations and rebalancing needs.
When volatility targeting is most useful
I find it most helpful for:
It’s less useful if you already have a very conservative glidepath, large guaranteed income (pensions, annuities), or if your portfolio is too small to justify the transaction cost overhead.
If you’d like, I can share a sample spreadsheet (with formulas for the rolling volatility, allocation multiplier, and trade signals) that you can adapt to your ETFs and tax situation. I’ve used this approach in small retirement portfolios to reduce early-sequence drawdowns while preserving participation in recoveries — not perfect, but practical, evidence-driven, and implementable without exotic instruments.
