While the author agrees with Modern Portfolio Theory (MPT) on equity allocation, he proposes that MPT is necessary but not sufficient part of Wealth Allocation. Wealth allocation should also include a low risk/low return bucket (e.g. home, cash) and a high risk/high return bucket (e.g. investment real estate.) A diversified stock portfolio would only be part of the mid risk/mid return bucket.
Here's how Chhabra allocates a wealth portfolio by risk buckets:
Allocation By Risk Bucket
|Purpose||Maintain basic standard of living||Maintain lifestyle||Enhance lifestyle|
This article and analysis was eye opening for me. My percentages are skewed towards the aspirational risk, primarily due to my retirement account being invested in company stock. (For reference, company stock is the only option available for my employer contributions.) This analysis also helps me understand why I have been more comfortable with low risk investments in my personal accounts - i.e. because I am currently over invested in the aspirational risk category. So the 47% percent of investments that I directly control are split 77% cash equivalents and home, and 23% in the stock market.
Also, as I think about a retirement investment strategy, I will need to consciously decrease my concentration in company stock and increase my exposure to the overall stock market.
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This is not financial or investment advice. Please consult a professional advisor.
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