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"When you think about your portfolio and it\u2019s components, what items come to mind? Your stocks, bonds and mutual funds, naturally, whether they\u2019re 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).) \u00A0And perhaps you consider investments that you\u2019ve made \u2013 angel style \u2013 in start-up companies, or rental properties that provide you with ancillary income.\u00A0 These all fall under the uber-heading of \u201CInvestments,\u201D with a capital I.\nDavid Blanchett, head of retirement research at Morningstar Investment Management, wants you to think bigger. In a new white paper entitled \u201CNo Portfolio Is An Island\u201D (thank you, John Donne), he argues that your home, job and pensions (including Social Security) are an important \u2013 and often overlooked \u2013 part of the picture. \u201CThe vast majority of investors take an island perspective on their wealth,\u201D he said. \u201CThey say, \u2018Ok, I\u2019m going to buy this stock or make this change to my portfolio,\u2019 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.\u201D\nTo get a better sense of what he\u2019s talking about, consider company stock.\u00A0 We\u2019re used to the notion that there\u2019s 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 \u2013 and suffer doubly.\u00A0 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:\nDo you live in a one company town?\u00A0\nIf so, it\u2019s 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.\u00A0 \u201CThe less diversified, economically, your town is, the less risk you want to be taking in your portfolio,\u201D 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.\nDo you live in a one-industry city?\u00A0\nIf your city has many businesses all focused on a single industry, you should take similar considerations. Take San Francisco, he suggests. It\u2019s 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\u2019t be. \u00A0It\u2019s a means of diversifying overall.\nIs your job secure or volatile?\u00A0\nDo you work in an industry currently going through consolidation or a company that, for whatever reason, is having a rough go of it?\u00A0 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\u2019s the case, the traditional three-to-six month emergency cash cushion is probably not sufficient for you.\u00A0 Consider doubling up.\nHow much equity do you have in your home? \u00A0\nFor many people, Blanchett explains, your house is your most leveraged asset. If you put 20% down, you have a five-times leverage factor. So if the value of the place increases by 5%, your realized return (on your equity) is 25%. On the flip-side, for people who have really large mortgage balances, even a small drop in housing can wipe your equity out.\u00A0 \u201CWhen you\u2019re thinking about how risky your home is, first think about where you are in respect to your neighborhood and region,\u201D he says.\u00A0 \u201CBut also think about how much leverage you have.\u201D\nHow much of your income comes from Social Security and pensions?\u00A0\nThis, of course, applies to folks already in retirement \u2013 but it\u2019s also something to think about as you get close. The bigger percentage of your income that comes from guaranteed sources, like Social Security, pensions and other annuities, the more risk you can take in your portfolio. \u201CSocial Security is really just like a bond if you think about it,\u201D says Blanchett. \u201CThat\u2019s how you have to think about it when determining the asset allocation for your overall wealth.\u201D\nAnd if you find all of these factors a little, well, squishy?\u00A0 Well, so did I. These questions are meant to encourage you to take a high-level perspective, says Blanchett.\u00A0 \u201CFor most people the best approach is to ask yourself: \u2018Do I think my job is riskier than average? What are the different unique risks I have that should affect my portfolio?\u2019 The key is to say, how can I make my overall portfolio best accomplish my total wealth goals.\u201D"^^<http://www.w3.org/2001/XMLSchema#string>
<http://fortune.com/2014/07/07/for-retirement-how-to-invest-beyond-stocks-and-bonds/>