Ibbotson Associates has received a patent on its portfolio model, which allows individual investors portfolios to be created on the concept of financial and human capital.
Ibbotson, a subsidiary of Morningstar, is hired by many mutual fund and insurance companies to construct portfolios, and also uses its portfolio models for individual investors in its defined contribution advice and managed account programs.
Financial capital is defined as an investor’s current savings and human capital refers to an investor’s future potential savings. Usually, human capital is financed by bonds, which offer regular interest payments.
Young investors have more bond-like human capital as they have a lot more time to save and grow their money than older investors. Older investors should play it safer and guard their financial capital with larger concentrations in conservative investments.
The method was developed by Peng Chen, president and chief investment officer at Ibbotson, Roger Ibbotson, founder of Ibbotson, and Mike Henker, former president of Ibbotson. It was meant to automatically establish an investor’s portfolio mix by taking into account factors of human capital, financial capital, age, savings rate, and risk profile.
“Andre Agassi and I are the same age, and we many even have the same risk tolerance, but that doesn’t necessarily mean we should have the same asset allocation,” Chen said. “An investor’s tolerance for risk and age should not be the only factors that determine asset allocation in a portfolio,” he said.