Tuning In To Your Total Portfolio

by: Sue Thompson

Often when we hear about “investment portfolios” our minds go to stocks, bonds, cash, ETFs and mutual funds. We think about our 401(k) and IRA. In other words, we think about investable assets, and we pretty much stop there.

But I would argue that there’s more to your portfolio than just the securities in your brokerage account. The reason we look at portfolios as a whole is to assess the overall risk/return characteristics in order to determine whether we can meet our financial goals. Because of that, it’s important to take a broader approach when assessing your total portfolio and the risks it may be susceptible to.

Housing is a great example. Anyone who owned a home in the hot real estate market of 2004-2006, and then suffered the dramatic decline in value in subsequent years, perhaps started thinking of their house as part of their overall portfolio.

But I would argue that doesn’t go far enough.

Let me give another example. Let’s take a couple that seems like they’re doing everything right. They did a careful analysis of whether to rent or buy and, given today’s low interest rates, have purchased a home that they can easily afford the mortgage on. They max out their 401(k) contributions, have a “rainy day fund”, limited exposure to student loan/credit card/auto debts and are currently saving 10% of their after tax salaries in additional long term savings. They’ve even started a 529 plan for their baby. Their investments are well diversified, representing domestic equity, international equity and some fixed income, generally in the weights that are commensurate with market cap weighted indices. So, they’ve appropriately planned for the potential risks to their portfolio… or have they?

Now, let’s add a few more salient facts.

Let’s say that one spouse is a petroleum engineer working for an energy company, living in an area of Texas that is heavily dependent on the energy sector. And that the other spouse is a CPA, specializing in oil & gas taxation. Just by adding these facts, we instinctively know that if oil prices drop to $30 a barrel, this couple’s financial future could be derailed. By defining their portfolio too narrowly, they failed to see some of the biggest risks to their financial future.

Your financial advisor should be assessing these risks for you and determining whether a different asset allocation is warranted. In my opinion, this is one sign of a good advisor, and something I’ve asked about in my own search for a financial professional.

Perhaps in the case of our hypothetical couple, their advisor could suggest they invest none of their financial assets in the energy sector and perhaps even overweight investments in areas that are negatively correlated to the energy sector.

Whatever the investment outcome, taking the step of identifying your “total portfolio” and its inherent risks is one strategy that can keep the financial surprises at bay.

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