Do Investors Consider Nonfinancial Risks When Building Portfolios?

Abstract

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.