20 April 2018

Are You Overlooking Your Biggest Assets?

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When deciding how to divide a portfolio between stocks and bonds, many investors simply subtract their age from 100 to determine what percentage to put into stocks, and invest the rest in bonds. But new research indicates it's important to consider something many investors and financial advisers overlook: the value and riskiness of your other assets, your future employment income and your home equity. It is important because for many people assets such as Social Security benefits, pension benefits, and home equity can make up half of their total wealth.

More Like Bonds 

For most investors, these assets have more in common with bonds than with stocks. For example, Social Security and pension benefits, along with paychecks issued by stable companies, are predictable sources of income that resemble the interest payments on bonds. 

As a result investors should add most—if not all—of the value of these assets to the bond part of their portfolios. If that makes their overall wealth too heavily concentrated in bonds, they should adjust by selling some bonds and buying more stocks.

Running the Numbers 

For a 65-year-old woman to roughly calculate the value of her future Social Security benefits, she would start with her annual benefit and multiply by 20. The multiplier—which takes into account mortality estimates and the math required to discount future benefits into today's dollars—is different for each gender and at every age.

To add real estate to the picture, simply add your current home equity to the total you have invested in bonds—in most cases. Those in volatile housing markets or areas that depend on the fortunes of a single employer or industry might want to treat as much as half of their home equity as a stock.

To figure the value of future wages, a 55-year-old man would multiply his current salary by about nine; the multipliers for wages assume that the investor will retire upon turning age 65 and that future earnings will increase annually by the inflation rate.

Click here for the full article from The Wall Street Journal.

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