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My Total Portfolio

Charles D. Ellis

TIME AND AGAIN, we’re reminded to fully understand a question—particularly when the question is complex—before acting or deciding not to act.

“Johnny pushed me” may have been the whole story, but not likely. Why did Johnny push David? What was the context? How are the two boys connected? What’s their history? Was it a big push? Did it do harm?

Ideally, we want to know the whole situation before we decide what to say or do. And so it is with investing. We can only make wise decisions when we know all the main parts, how they affect each other, and whether they fit together or not.

Curiously, most investors look only at their financial portfolio when trying to decide what to do with their investments. This habit is harmful. It’s like tying one arm behind our backs when going into the prize ring. Let me give you a specific example: me. For years and years, when I thought of my investments, I “put my blinders on” and thought only about that part of my total portfolio.

Wrong.

If I’d set out to make an important investment decision, I would almost certainly have made a mistake. Even worse, I would have been serene—comfortable in the thought that I understood the situation.

Where did I go wrong? As I was framing the question about my investments, I was leaving out large parts of the whole picture. You may be making the same mistake. If so, take a fresh look with me.

You see, I wasn’t including important chunks of my total portfolio. For example, I didn’t include Social Security benefits. Nor did I include private pension benefits. If you had asked me whether I would give these away to a stranger, I would have said, “Of course not.” And you likely wouldn’t be surprised at my response. Yet, if you had asked me how much these assets were worth, I would have been stumped for an answer. I couldn’t have guessed within 30% of their value either way.

When making investment decisions, most of us look right past our life’s total portfolio and focus only on our stocks, bonds and other securities. Yet, for many, securities are only a small part of the whole.

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In the same way, we ignore our homes. While I agree that a house is not so much an investment as it is a consumer durable, it does store value. It can be sold and converted into money. It, too, is a financial asset, and a component of your total portfolio.

For many young professionals, by far their largest asset is their intellectual property or expertise. This enables them to earn high incomes for many, many years. For someone in her 20s or his 30s, this asset is enormously valuable. Even though it isn’t counted by most, it actually dominates their total portfolio.

All of us should give careful consideration to all the components of our total portfolio before answering basic questions about the securities portion. Such questions include, “How much should I invest in stocks? How much in bonds?”

The chances are high that most of us would substantially reduce the amount we have in bonds if we considered carefully all the components of our total portfolio. Assets like our home, Social Security and earning power don’t go up and down the way stocks often do. Our total portfolio may be far more defensive or “conservative” than it should be.

The self-inflicted harm of unforced errors like this is way too great. We shouldn’t just shrug our shoulders and not be concerned. We should take full responsibility for thinking through the whole picture when making long-term investment decisions. The fact is, the costs of being suboptimal—or truly off-course—can compound into major money forgone for both ourselves and our families.

Charles D. Ellis is the author of 18 books, including Winning the Loser’s Game, which is now in its 8th edition, with 600,000 copies sold. Charley has taught investing courses at both Yale and Harvard business schools, and he served for 17 years on Yale’s investment committee. His previous article was Why Retire at 65?

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Bob Wilmes
Bob Wilmes
11 days ago

Hi Mr. Ellis – could you please share what you and the late David Swensen’s thoughts are/were on ESG investing and what impact ESG has on index investing like Vanguard’s Total Stock Market index. I know ESG investors are shunning natural resources and energy stocks, causing their market caps to decrease. When I see Exxon Mobil’s market cap compared to Tesla’s I am somewhat shocked, even more now as Tesla is a member of the S&P500. Thank you.

Rick Connor
Rick Connor
11 days ago

Thanks Mr. Ellis. Including the NPV of SS and a pension to your Balance Sheet absolutely helps clarify how conservative or risky your portfolio is. When I started looking at it this way a few years ago, I got much more comfortable holding a higher percentage of stocks approaching retirement.

Mike Wyant
Mike Wyant
9 days ago
Reply to  Rick Connor

Since retirement, I have intuitively looked at my pension and ss as part of my fixed income allocation. It helps me be much much more comfortable with a 60/40 equity/bond market allocation at age 67. I could probably make an arguement for 80/20, but I’m not there (emotionally) yet.

booch221
booch221
10 days ago
Reply to  Rick Connor

How do you determine the NPV of a pension or SS?

johntlim
johntlim
10 days ago
Reply to  booch221

You would discount each year’s payout to get its present value and them add those present values. The discount rate you choose is a bit more art than science, but you could use something like the 10 year Treasury yield. All this could be done fairly simply on an Excel spreadsheet.

But an even easier “rule of thumb” would be to reverse engineer the 4% rule. Divide the annual payout from the pension or SS by 4% (or 3% if you think the 4% rule is too aggressive in this low interest rate environment). Example: if your pension pays out $20,000 a year, you divide $20,000 by 4% to get $500,000. The basic idea is that your pension provides the same level of income as a nest egg worth $500,000.

Hope that helps!

Thomas Taylor
Thomas Taylor
11 days ago
Reply to  Rick Connor

I’m in that same camp Rick. Knowing that we were going to have a good foundation with my wife’s pension and SS has allowed me to feel comfortable maintaining a much higher allocation to equities as I approach retirement as well.

John C
John C
11 days ago

Wonderful observations Mr. Ellis. For those of us who use an advisor these are good points for to ensure the “whole picture” is being taken into consideration. Thank you and Jonathan’s creation Humble Dollar for sharing such good nuggets with us all.

Last edited 11 days ago by John C

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