Morningstar Magazine - February/March 2015 - 54

Strategies

A Total Wealth View An investor's assets and liabilities encompass many elements.

Financial Capital

Human Capital

Housing Wealth

Pension Wealth

Stocks, bonds, and other
tradable investments-

Future wages-the total

Home ownership-

economic value of
a person's set of skills
and talents.

the net equity value
of a person's residence.

Social Security, pension
beneﬁts-nine out of 10

the most liquid portion of
a person's total wealth.

Americans age 65 and
older receive Social Security.

TOTAL WEALTH

(though this needn't be the case and points
toward future development). Analyses of individual
stocks or fund managers also fall outside the
framework. Total Wealth is essentially a normative
framework-it is advice-based and not meant
to be a model of what investors do but what they
should do.
A Word From Our Sponsor

Total Wealth is the logical extension of
Morningstar's mission to help individual investors.
In fact, through our online retirement
platforms, Morningstar has been in the Total
Wealth space for some time. Considering
that mPower-which Morningstar acquired in
2003-had been providing advice since
1996, the lineage is long. The mPower model fell
within the Total Wealth framework.
Morningstar's more recent acquisitions of
ByAllAccounts and HelloWallet move us forward
in making Total Wealth operational. The
former will allow for aggregation of data from
investors' accounts, and the latter, an evolving
record of their consumption habits and self-

54

Morningstar February/March 2015

diagnostic tool for investors to continually evaluate
the impact of consumption decisions on their
overall financial position.
With respect to research, we are working to
improve our model of human capital and lifetime
earnings (the biggest asset in most investors'
portfolio), modeling of housing wealth,
and treatment of taxes. We are also working to
incorporate the treatment of credit card and
other debt.
The ability to turn theory into practice to
substantially improve the lives of investors has
never been more within reach. So, at the
risk of puffery, we are at the start of a new and
better age for investors. K
Hal Ratner is global head of research with Morningstar
Investment Management. He is a member of the editorial
board of Morningstar magazine.
Selected References
Arrow, K.J. & G. Debreu (1954), "Existence of Equilibrium
for a Competitive Economy," Econometrica, vol. 22,
no. 3 (July), pp. 265-269.

Bodie, Zvi (2003), "Life-Cycle Investing in Theory and
Practice," Financial Analysts Journal, vol. 59, no. 1
(January/February).
Merton, Robert C. (1969), "Lifetime Portfolio Selection
Under Uncertainty: The Continious Time Case," The Review
of Economics & Statistics, vol. 51, no. 3, pp. 239-246.
Samuelson, Paul A. (1969), "Lifetime Portfolio Selection
By Dynamic Stochastic Programming" Review of Economics
and Statistics, vol. 51, no. 3, pp. 239-246.
Sharpe, William F. (2002), "Budgeting and Monitoring
Pension Fund Risk" Financial Analysts Journal, September/
October 2002, pp. 74-86.
Treynor, Jack, Patrick Regan, and William Priest Jr. (1976),
The Finnacial Reality of Pension Funding Under ERISA,
Homewood, IL, Dow Jones-Irwin.
Morningstar Magazine - February/March 2015

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