How Should I Count [Something] In My Asset Allocation?

I often receive questions about how or whether to count various things e.g., Social Security, a pension, or an annuity in your asset allocation. For example, a reader recently wrote in with the following question:

“I want an asset allocation of 50/50. $200,000 of my total portfolio is in a Vanguard variable annuity that is actually a Wellington managed mutual fund with the guaranteed withdrawal benefit rider in place. The Wellington fund has 65% in stocks and 35% in bonds.

When I figure the allocation, do I include the $130,000 in the stock allocation and the $70,000 in bonds in the allocation, or because I am taking the guaranteed benefit rider should I look at the $200,000 as fixed income? Or should I ignore it completely?”

I think it makes more sense to approach the question from the other direction. That is, rather than setting a desired overall allocation, then trying to figure out what the annuity should be counted as in order to reach that allocation, I would instead ask how you want the rest of the portfolio to behave.

Remember, the goal isn’t a specific allocation. The goal is a specific level of risk. So, given how the annuity works, how much volatility are you comfortable having in the rest of your portfolio?

The answer to that question rather than a desire to meet an allocation goal should inform the decision of how you allocate the remainder of your portfolio.

For example, using the reader’s example from above, if we assume a $1,000,000 total portfolio, $200,000 of which is in the Vanguard variable annuity, if you:

  • Decided that the largest portfolio decline you could tolerate from the non-annuitized portion is, say, $200,000, and
  • You’re comfortable assuming stocks won’t fall by more than 50%,…

then you would want to limit your stock allocation in the non-annuitized portion to $400,000 that is, twice the $200,000 maximum tolerable loss.


Read the complete article here:   How Should I Count [Something] In My Asset Allocation?.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s