Calculating a family’s asset mix

Abstract


 
 
 Two conclusions are reached about how a family should calculate its asset mix. First, if the assets will be used to finance retirement needs, the asset mix should be based on after-tax values, because goods and services are purchased with after-tax dollars. This novel conclusion rejects current practice. The second conclusion concerns which assets and liabilities should be included in the portfolio. If the purpose of the calculation is to consider a family’s retirement needs, the asset mix should include the promises of defined-benefit pension plans and Social Security, and the family’s mortgage should be treated as a short bond position. Also, if the family is willing to downsize or borrow against the residence, part of its value should be included in the portfolio. © 1998 Elsevier Science Inc. All rights reserved.
 
 

Asset Allocation and Section 529 Plans

“…This fits well with Reichenstein (1998). He illustrates the importance of considering the investor's entire balance sheet, including not only his financial assets but also, for example, his pension assets, life insurance and mortgage liabilities.…”

Strategic asset allocation for individual investors

“…Given the dominance of strategic asset allocation decisions over security selection and market timing decisions (Brinson, Hood & Beebower, 1986), there is a critical need for accuracy in determining the portfolio. Reichenstein (1998Reichenstein ( , 2000 reviews and analyzes the inclusion and valuation of portfolio assets. He advances and enhances the Scott (1995Scott ( , 1997 view of an "investment portfolio"; that is, assets that generate spending money or that can be sold for spending money.…”

“…Reichenstein (1998Reichenstein ( , 2000 argues for including the present value of Social Security benefits in asset mix decisions, but does not quantify it because of Social Security's complexities. Scott (1995) argues for inclusion of Social Security wealth as a fixed income component of the total portfolio, but in discussing pensions is ambiguous in her prescription.…”

“…Her pension example uses nominal treasury yields, but this ignores Social Security's inflation adjustment as well as risk adjustments (e.g., default risk in her corporate pension). We build on Reichenstein's (1998Reichenstein's ( , 2000 and Scott's (1995) valuable insights.…”

“…We address these questions in separate sections below. Scott (1995Scott ( , 1997, Reichenstein (1998Reichenstein ( , 2000 and others advance a concept we label an individual's "total portfolio." This total portfolio includes the traditional financial portfolio (stocks, bonds, cash, etc.)…”