How to Allocate Your Household Portfolio
Asset allocation is a statistical way to optimize a
portfolio’s return. Individually stocks and bonds are very volatile investments.
However, a combined portfolio of 50% stock (S&P500) and 50% bond (Lehman
Brothers Bond Corporate Index) the volatility is less evident and the returns
may be more stable over the long term.
An article from Financial Analysts’ Journal May/June 1991 entitled:
Determinants of Portfolio Performance II: An Update states
- 93.6% of portfolio
return is asset allocation
- 2.5% is security selection
- 2.2% is other
is market timing.
As you can see, proper asset allocation is vital to investment
Thus, how can a couple properly allocate their investment assets now and in their retirement years? There are two
popular views on this subject.
The first option is to consider all the accounts as one household account.
The second is to divide the money into "his" and
"hers". Let’s examine each strategy.
Consider all Accounts as one Household Account
It doesn’t matter if the accounts are 401k’s, IRA, stocks, bonds, or
cash. The benefit of considering all of the investments accounts as one is they can usually
obtain a higher quality of total portfolio diversification. For example, both husband and wife have a $20,000 401k balance, $5,000 IRA balance and a
combined checking and saving account balances of $3,000. Below are the steps to
consider when diversifying your household accounts:
#1: Review all the investment options in each 401k plan: This will
allow you to determine if duplication exists.
#2: Do not duplicate your investment objective: For example, the
wife has 100% of her 401k balance in the ABC Large Company Growth fund and the
husband has 100% in the XYZ Large Company Growth fund. Is this couple properly
diversified? Judging by the names of the mutual funds, they are probably not.
Just because the funds have a different name, the investment objective may be
To determine the investment objectives of your mutual funds in your 401k plan
obtain a plan information package from your Human Resource
department. This packet will contain a prospectus and possibly
additional information on each fund available in the plan.
#3: Reallocate your assets to ensure proper diversification: In the
above example, what should be done to properly diversify the assets?
This couple may consider investing 50% of the wife’s 401k into the ABC Large
Company Growth fund, 50% into the DEF International fund.
could invest 50% of his 401k into the GHI Small Company fund and 50% in the JKL Bond fund. Thus, the
household 401k is allocated 25% Large Company Growth, 25% Small Company Growth,
25% International, and 25% Bonds. (This asset allocation is not a
recommendation. It is for example and educational use only.)
#4: Follow the same strategy for the household IRA’s and cash accounts:
By following the same methodology with the remainder of the assets your
investments should be properly diversified.
#5: Review and rebalance your asset allocation on an annual basis:
Your account values will usually change daily, consider rebalancing your
accounts at least annually. Changes in portfolio value include:
- New money invested into your accounts
- Daily price movement of your portfolio
Due to these factors, your initial asset
allocation may by out-of-whack at the end of the year. Review and
rebalance your portfolios at least annually.
His and her investment accounts are not
considered as one household account
Many of the steps in the combined portfolio can be used to allocate the
assets in individual accounts. However, the asset allocation quality may not be as
good as the combined household strategy.
Let me explain why. This is especially
true if the couple is just starting to invest. For example, some mutual fund
companies state the minimum amount to open an account is $3,000 per fund.
each person only has $3,000 and follows the "his" and "her"
individual approach, each person will probably invest into what they believe will be most
beneficial to them as individuals and not the couple.
Thus, each may invest
their $3,000 into the LMO Large Company Growth fund. No true diversification is
achieved. However, if the couple decided to
"pool" their money they could invest $3,000 into the LMO Large Company
Growth Fund and the remainder $3,000 into an LMO International fund. Granted this
problem becomes less evident as the portfolio of each person grows, because the
minimum requirements are not an issue.
Thanks to technology and the Internet, I
firmly believe it is much easier today to manage and invest your own money than
it was only 10 years ago. Consider learning more about the stock marketing and
investment strategy yourself. Check out the information on the
Contact a Professional
page on our website.
Whichever method you follow, remember to stay true to your investment
strategy. This will ensure your goals are met. Good luck