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By Christine Benz and David Blanchett | 03-12-2014 03:00 PM

There's More to Wealth Than Your Portfolio

Investors need to observe all the factors in their total wealth allocations and adjust their portfolios accordingly based on nonfinancial assets.

Christine Benz: Hi, I'm Christine Benz for Investors often focus on age and risk tolerance when making asset-allocation decisions. But other factors should be in the mix, too. Joining me to discuss that topic is David Blanchett. He is head of retirement research for Morningstar.

David, thank you so much for being here.

David Blanchett: Thanks for having me.

Benz: You worked on a paper where you looked at what you call total wealth allocation. The basic suggestion is that people should look at their total wealth in aggregate, thinking about their human capital, homes they own, the whole gamut of ownership. Let's talk about what you see are the key other factors apart from just the financial assets that investors should have in mind when thinking about their asset allocation?

Blanchett: Sure. I guess the overarching theme is that no portfolio is an island. A portfolio is your financial assets. It's one part of someone's total economic worth. And things like your real estate--your house--your pension all should come into play when thinking about how do I build the right portfolio for me?

Benz: Let's take these one by one. The key things that you think investors should be thinking about when they are looking at asset allocation. One is the industry in which they work--so not just their human capital and how long they will be working, but also where they are working. How should that influence the decision-making, say, if someone works in the financial sector?

Blanchett: Human capital is that ability for us to go out and earn a wage. Everyone's human capital is different. To your point, someone who works for a bank--banks are usually more like large-value-type stocks--and so if you work for a bank you should probably hold, for example, less large value in your portfolio.

Another example is if you are a real estate agent, you should probably hold fewer REITs in your portfolio. If you work for an energy company in Texas, you should probably hold fewer commodity stocks, for example, because each of those is kind of correlated to your portfolio so you want to diversify away from that if you can in your financial assets.

Benz: Your economic fortunes tied to your job are going to fluctuate in a certain way, and the idea is that you don't want your portfolio necessarily fluctuating in that same way, as well?

Blanchett: Correct. I think a great example is former Enron employees who had all of their 401(k) assets invested in Enron stock and their personal portfolios, as well. So at the same time they had a bad shock: They lost their jobs and they lost their portfolios. So the goal is to smooth those changes in wealth over time.

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