Wealthfront’s investment methodology is based on Modern Portfolio Theory. It states that returns are best maximized for any level of risk through the optimal mix of asset classes. Your allocations are a function of your risk tolerance, not the amount you invest. One of the “objective” factors in your risk tolerance is your Liquid Net Worth. We use your Liquid Net Worth (along with your age and current income) to estimate if your income at retirement is likely to be greater than your retirement spending needs. The greater your retirement income relative to your retirement spending, the more risk you are able to take. Therefore your risk tolerance should increase as your Liquid Net Worth increases, which should increase your allocation of equity ETFs, but is independent of the amount invested.
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