No Portfolio Is an Island

The authors incorporated nonfinancial assets—industry-specific human capital, region-specific housing wealth, and pensions—into a traditional portfolio optimization and found that the optimal portfolio varies materially for different compositions of total wealth. In particular, they found that the optimal equity allocation decreases with age, riskier employment, and riskier homeownership, whereas it increases with guaranteed pension income. These results suggest that every portfolio needs to be considered in the context of an investor’s total wealth.