<#if page.ID == "About"> In This Section
<#else> View Our Practice Areas

Don't Invest with an "Island" Mentality

The result of an "island" mentality is a portfolio that isn't fitted to the individual for maximum efficiency. A lot is made about efficiency within investment portfolios, but no portfolio can be efficient without considering an investor's total wealth. No man is an island, as Donne said, and neither is a portfolio.

A recent MarketWatch article, titled "No man is an island, as Donne said, and neither is a portfolio," explored the "island" perspective to asset allocation and why you shouldn't invest in this way. Why? Because the portfolio is examined in isolation and does not consider the investor's "total wealth." By contrast, a total-wealth perspective encompasses an investor's other assets, such as human capital, real estate and potential pension benefits-each of which has unique risk factors. As a result, the concept of "background risk" is important to consider when building a portfolio.

Human capital is the total economic value of an individual's skills and talents and is estimated as the present value of future wages. It is seen as a way to quantify a person's earning ability. The riskiness of human capital is based on an individual's occupation and industry; however, it is typically considered a relatively bond-like asset. Human capital can be the largest asset in younger individuals' total wealth portfolios, suggesting that portfolios of these individuals should be more aggressive than those of older people (with less human capital) and the reason why target-date fund providers suggest a decreasing equity glide path as an individual approaches retirement.

The original article also says it is important to consider the relationship of human capital to different investment assets and that it applies especially to holding stock in your employer. A negative event for the company (something economists call a "shock") could cause an individual's investment capital and human capital (job loss) to fall simultaneously. Enron is a good illustration, where former employees found out that, not only were they out of work, but their 401(k) savings were cut in half as over 50% of the plan's assets were invested in Enron stock.

So, do not try to invest with an "island" mentality, a portfolio that is not set to the individual for maximum efficiency. No portfolio can be efficient without considering an investor's total wealth.

For more information, please visit my estate planning website.

No Comments

Leave a comment
Comment Information
Email Us For A Response

Find Out The Difference That Experience And Expertise Makes

Get the peace of mind that you deserve. First, attend a seminar. This will entitle you to a free initial consultation and a discounted estate planning fee. To learn more about our services or sign up for a seminar, contact us online or call us at 866-402-1805. We have offices in Torrance, Orange, Newport Beach, Pasadena and Woodland Hills.

Questions? Contact Us.

Bold labels are required.

Contact Information

The use of the Internet or this form for communication with the firm or any individual member of the firm does not establish an attorney-client relationship. Confidential or time-sensitive information should not be sent through this form.


Privacy Policy

Call Now For A Free Consultation: 866-402-1805
  • ${site.data.firmName}${SEMFirmNameAlt}
  • Main Office: Torrance

    Torrance Office
    990 West 190th Street
    Suite 500
    Torrance, CA 90502

    Toll Free: 866-402-1805
    Map & Directions

    Orange Office
    333 City Boulevard West
    17th Floor
    Orange, CA 92660

    Toll Free: 866-402-1805
    Map & Directions

    Newport Beach Office
    5000 Birch Street
    Suite 8000
    Newport Beach, CA 92660

    Toll Free: 866-402-1805
    Map & Directions

    Pasadena Office
    790 East Colorado Boulevard
    9th Floor
    Pasadena, CA 91101

    Toll Free: 866-402-1805
    Map & Directions

    Woodland Hills Office
    5850 Canoga Avenue
    4th Floor
    Woodland Hills, CA 91367

    Toll Free: 866-402-1805
    Map & Directions

    Office map