For retirement, how to invest beyond stocks and bonds

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July 7, 2014 by Bill Johnson


Your home, job and pensions are an important – and often overlooked – part of your investment picture.

When you think about your portfolio and it’s components, what items come to mind? Your stocks, bonds and mutual funds, naturally, whether they’re in a 401(k) or a discretionary account. No doubt you think about company stock if you have it (a new piece of research from Fidelity says 10% of employees who have this benefit consider it more important than their 401(k).)  And perhaps you consider investments that you’ve made – angel style – in start-up companies, or rental properties that provide you with ancillary income.  These all fall under the uber-heading of “Investments,” with a capital I.

David Blanchett, head of retirement research at Morningstar Investment Management, wants you to think bigger. In a new white paper entitled “No Portfolio Is An Island” (thank you, John Donne), he argues that your home, job and pensions (including Social Security) are an important – and often overlooked – part of the picture. “The vast majority of investors take an island perspective on their wealth,” he said. “They say, ‘Ok, I’m going to buy this stock or make this change to my portfolio,’ while totally ignoring other risk factors. All of these other things should, to some extent, come into play when figuring out what is the optimal portfolio for individuals who are investing.”

To get a better sense of what he’s talking about, consider company stock.  We’re used to the notion that there’s a high correlation between the risks of your job and the risks of company stock you own. If the company does poorly, you could lose your job at the same time your holdings take a dive – and suffer doubly.  Blanchett and his co-author Philip Straehl, also of Morningstar, are essentially saying that there are other things that work similarly and that you should take them into account when deciding how much or how little investment risk you want to take. For example:

Do you live in a one company town? 

If so, it’s important to consider what happens if that company falls on tough times, or goes under. You could lose your job, but you could also lose significant value in your home because if that company is not hiring, fewer people will want homes in the area. Similarly, the town could lose its tax base, which could send the burden on homeowners up.  “The less diversified, economically, your town is, the less risk you want to be taking in your portfolio,” Blanchett says. And if you suspect the company is headed for tough times renting a place to live rather than buying one may be a smart move.

Do you live in a one-industry city? 

If your city has many businesses all focused on a single industry, you should take similar considerations. Take San Francisco, he suggests. It’s a very large city but if, for some reason, tech stalled and there was little innovation for the next five years, there would be a dramatic, negative impact on the entire city. In that case, you want to be sure your portfolio is invested in things other than technology and things that could act as buffers, if technology falters. Similarly, if you work for a bank, for example, your job and any company stock you own are tied up in large value so your portfolio shouldn’t be.  It’s a means of diversifying overall.

Is your job secure or volatile? 

Do you work in an industry currently going through consolidation or a company that, for whatever reason, is having a rough go of it?  Or, do you have a history of being in and out of the job market (some people seem to suffer more periods of unemployment than others). If that’s the case, the traditional three-to-six month emergency cash cushion is probably not sufficient for you.  Consider doubling up.

Read more: For retirement, how to invest beyond stocks and bonds

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