Bridge over ocean
23 September 2019 Financial Analysts Journal Volume 75, Issue 4

Do Investors Consider Nonfinancial Risks When Building Portfolios?

  1. David M. Blanchett, CFA
  2. Michael Guillemette

The authors look at empirical evidence from US defined-contribution plans and find that investors appear to consider nonfinancial risks when determining portfolio risk levels but not to an extent that would be considered optimal.

Households typically have significant wealth that is not in their investment portfolios, such as human capital and real estate. Basic economic theory indicates that the risk of these nonfinancial assets should affect the allocation of the household’s financial assets. Little empirical evidence has been gathered, however, to indicate whether such a risk assessment actually does (as opposed to merely should) occur. We used longitudinal data to explore this question in the portfolio decisions of 36,755 participants proactively managing their portfolios in 268 defined-contribution plans. We found statistically significant differences in equity allocations among different industries and locations. We also found that investors with more aggressive (conservative) nonfinancial assets tend to have more conservative (aggressive) portfolios, which is consistent with economic theory.

Read the Complete Article in Financial Analysts Journal Financial Analysts Journal CFA Institute Member Content

We're using cookies, but you can turn them off in Privacy Settings. Otherwise, you are agreeing to our use of cookies. Learn more in our Privacy Policy.