Multi-objective private wealth allocation without subportfolios

As opposed to institutional investors, individual investors typically have several investment objectives in mind. The traditional utility maximization approach is not only oversimplified but also may not be suitable for real world application. Behavioral asset allocation divides a portfolio into subportfolios, which can cause potential problems. This paper follows the Modern Portfolio Theory and introduces the practical idea of treating some goals as constraints. How this works in practice is illustrated by an example of an individual having three different objectives. This article follows the idea of Chen et al. (2006) and includes life insurance. Consumption is modeled into three parts and accommodates a reasonable basis for calculating life insurance requirements and generally integrates consumption into the investment decision. As a whole, the model provides a customized solution for the environment and complex investment goals of an individual.

► We propose a novel approach to deal with the multiple objectives of an individual. ► We introduce the net human capital concept for calculating the extended portfolio. ► We analyze the relation between the optimal allocation and some important factors. ► Correct identification of objectives is most important for wealth allocation.