Everything you own is in the same portfolio

These are listed in the order worth acting on, which with your whole balance sheet is not the order they are usually presented in.

The artificial boundary

People assess risk by looking at the investment account, because that is the part with a visible balance and a familiar interface. That account is frequently a minority of total assets, particularly for anybody who owns residential property.

A conservative investment portfolio sitting alongside a large mortgaged property is not a conservative overall position. The boundary exists because of how statements happen to be produced rather than because of anything about risk itself. Drawing the line around everything you own changes the answer to very nearly every allocation question.

What sits outside the account

Residential property is usually the largest single asset and is concentrated in one country, one region and frequently one street. Workplace pensions from previous employers may hold allocations chosen years ago and never once revisited since.

Cash held for emergencies, deposits and short-term goals is part of the total even though it is not invested. Employer shares, options and deferred compensation tie a further part of the balance sheet to a single company. Any expected inheritance or family support is genuinely uncertain and belongs treated as such rather than counted on.

Human capital is the largest holding for most of a career

The present value of your future earnings usually exceeds every financial asset you hold until fairly late in a working life. That asset has a sector, a geography and a level of stability, all of which interact with everything else you own.

In practice, somebody with stable public sector income holds something that behaves rather like a bond across their career. Somebody whose income depends on one volatile industry holds something that behaves considerably more like an equity position. The implication is that two people with identical account balances can be carrying very different total risk.

Where the exposures stack

Working for a listed company, holding its shares and living in the region it dominates concentrates several exposures on one event. A property in a town built around a single large employer has exactly the same structure at a smaller scale.

For most people, these stacked exposures are the most damaging kind, because they materialise simultaneously rather than one at a time. They are also completely invisible in any assessment that looks only at the investment account. The usual response is to avoid adding more of the same rather than to unwind what already exists.

Doing the exercise

Write every asset on one page with an approximate value, a geography and a note on what conditions would damage it. Include debt, because it changes the effective exposure of whatever asset it happens to be attached to.

Put simply, look for repeated entries in the geography column and the damage column, since repetition is where concentration actually lives. The page will be rough and it will still tell you more than an accurate reading of any single account. Redo it every few years or after any large change, rather than annually, because most of it moves very slowly.

Adjust the size of it until it is something you would actually do tired.

What actually changes as a result

The investment account is the most flexible part of the balance sheet, so it is where any adjustment is easiest to make. That frequently means it should look different from whatever a standalone assessment of it would suggest.

Somebody heavily exposed to one economy through property and employment may reasonably want their liquid assets somewhere else. None of this recommends any particular allocation, and how it applies to you is a matter for regulated advice. The general point holds regardless: the risk you carry is the total, not the part with the nicest interface.

Everything above, in order of what to do first

1. The artificial boundary. People assess risk by looking at the investment account, because that is the part with a visible balance and a familiar interface.
2. What sits outside the account. Residential property is usually the largest single asset and is concentrated in one country, one region and frequently one street.
3. Human capital is the largest holding for most of a career. The present value of your future earnings usually exceeds every financial asset you hold until fairly late in a working life.
4. Where the exposures stack. Working for a listed company, holding its shares and living in the region it dominates concentrates several exposures on one event.
5. Doing the exercise. Write every asset on one page with an approximate value, a geography and a note on what conditions would damage it.
6. What actually changes as a result. The investment account is the most flexible part of the balance sheet, so it is where any adjustment is easiest to make.

The takeaway

Risk is measured across everything you own. The account with the app is only the part you can see easily.

Small and repeatable beats ambitious and abandoned, almost every time.