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.
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
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the full article from The Wall Street Journal.