Saturday , 27 May 2017

A Portfolio Risk Assessment Should Include More Than Just Your Investable Assets – Here's Why

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. [Let me explain further with a few examples.] Words: 500

So says Sue Thompson in her most recent post* at entitled Tuning in to Your Total Portfolio.

Lorimer Wilson, editor of (Your Key to Making Money!) and (A site for sore eyes and inquisitive minds) has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Thompson goes on to say, in part:

The reason to look at portfolios as a whole is to assess the overall risk/return characteristics in order to determine whether one’s financial goals can be met. 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:

  • have purchased a home that they can easily afford the mortgage on.
  • have maxed out their 401(k) contributions,
  • have “rainy day fund”,
  • have limited exposure to student loan/credit card/auto debts and
  • are currently saving 10% of their after tax salaries in additional long term savings,
  • have started a 529 plan for their baby.
  • have well diversified investments, representing domestic equity, international equity and some fixed income, generally in the weights that are commensurate with market cap weighted indices.

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.

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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.


Editor’s Note: The above post may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.

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