Howard and Thelma Morrison were recently married. They are both in their early 30s, and each has brought valuable assets into their marriage. Now, they are in the process of consolidating them.
At the same time, they are starting to take a serious look at setting up an investment plan. Neither had really given much thought to investing before they were married; they simply made decisions about individual investments as the need arose, with no overall plan in mind. Now, they have decided that the best approach is to determine an appropriate asset allocation and try to refocus their investments according to the plan.
First, however, they need to take stock of where they currently stand—the current allocation of their investment portfolio. And that has led to some confusion: Which of their assets should they include as part of their "investment portfolio?" Some of the assets are relatively clear, but others are less so.
Table 1 shows the assets that the Morrisons think may "count" as part of their investment portfolio.
|Current Market Value* ($)||Include in Investment Portfolio?||Comments|
|5-Year CD||20,000||Yes||Category: Fixed income|
|Stock Fund||35,000||Yes||Category: Stock|
|GIC||15,000||Yes||Category: Fixed income|
|Money market fund||20,000||Yes||Category: Cash|
|Cash value life insurance||10,000||Yes||Category: Fixed income|
|Stock fund||30,000||Yes||Category: Stock|
|Stock Fund||30,000||Yes||Category: Stock|
|Balanced Fund||20,000||Yes||Category: Stock/Fixed Income|
|Condo||180,000||Yes||Category: Real Estate; not a consumption item|
|Expected Future Assets:|
|Thelma's Inheritance: 5 stocks||150,000||Yes||Category: Stock; expectation is soon and certain|
|Social Security||??||No||Distant and uncertain payments|
|Unvested pensions||??||No||Distant and uncertain payments|
|Total of all "investments"||$510,000|
|* Illiquid assets are valued at estimated market value. Condominiums are valued at estimated current market value less outstanding mortgage.|
|Asset Allocation of Combined Portfolios:|
Thelma has a checking account with a balance of roughly $2,000. She also managed to save $20,000, which she invested in a five-year certificate of deposit. Thelma's employer sponsors a 401(k) plan in which she participates. Her own contributions and the vested portion of her employer's contributions total $50,000, and she has invested these assets in a stock fund ($35,000) and a GIC (guranteed income contract) ($15,000). She also has unvested employer contributions, to which she will be entitled if she stays with the company for several more years. Thelma owns a condominium in which the couple is now living; her equity investment (estimated market value less the mortgage) in the unit is roughly $200,000. And Thelma has brought some "hard assets" into the marriage—she has about $10,000 worth of jewelry and $30,000 of antiques, which she enjoys collecting.
Howard has a money market fund totaling $20,000, and a small life insurance contract that he was talked into purchasing several years ago. He managed to save $30,000, which he has invested in a stock fund. His employer also sponsors a 401(k) plan in which he participates; his vested portion currently stands at $50,000, of which $30,000 is invested in a stock fund and $20,000 in a balanced fund (with a 50% stock/50% bond investment objective). Howard's company also sponsors a defined-benefit pension plan, although he has not been with the company long enough for his entitlement to amount to very much. Howard owns a condominium, which the Morrisons rented out once they decided to move into Thelma's unit. His equity investment in the condo is $180,000. Howard has a relatively new car that is worth about $30,000 and a stamp collection, valued at about $10,000.
The Morrisons also expect to receive certain assets in the future. Thelma's grandmother recently died and left her five stocks valued at $150,000, but the estate has not yet released the shares. In the more distant future, they hope to stay with their current employers and receive the unvested portions of their employers' 401(k) plan contributions and pension plan. Of course, both have been contributing to Social Security, and they hope to receive some payments once they retire.
While the Morrisons have been able to identify most of their assets, they are uncertain what they should consider as an "investment." The issue is important, because it will affect their asset allocation decisions.
After mulling over the issue for some time, however, the Morrisons reach some conclusions about what they will include in their "investment portfolio," what they will exclude, and how they will value and categorize their inclusions:
The bottom of Table 1 shows the Morrison's asset allocation based on their decisions concerning what to include and exclude. You can see that the resulting allocation would be quite different if, for example, they had excluded Thelma's probable inheritance or Howard's condominium.
The Morrisons ran into a problem faced by many investors—although many "investments" are easily identifiable, some are not. It is important to carefully consider what you should include and exclude from your "investment portfolio," because it can have an impact on your asset allocation. If you misdefine your investment portfolio, you may wind up with an asset allocation that is less efficient in meeting your needs.
An investment portfolio should consist of financial assets that you would be willing to sell for spending money or that generate some form of spending money, either now or some time in the future.
Many items, such as mutual funds, stocks and bonds, are obvious. But other items, such as your house or pension payments, are less clear.
Here are some points to consider if you are uncertain about what to include or exclude as part of your investment portfolio: