It's all about location: Where you live, work matters to your portfolio

At first glance, your state's business ranking may not appear to have much to do with how you should build your investment portfolio, especially if you aren't a business owner. After all, only a few companies represented in your stock and bond portfolios likely make a significant contribution to your state's economy.

However, the competitiveness of your local economy and the quality of your local real estate market may have important implications for your total wealth and, therefore, your investments.

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When building portfolios, investors tend to focus entirely on the risk-and-return characteristics of investments. This is what I call an "island" perspective to asset allocation, because it views the portfolio in isolation. In reality, though, your financial assets are only one aspect of your total wealth.

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The other assets "owned" by investors include such things as human capital, real estate and expected pension benefits. Each of these assets has unique risk factors that should be considered when building your portfolio. When thinking about your state of residence, concepts like human capital and real estate are especially relevant.

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Your human capital

Let's start with human capital. Human capital can be thought of as the total economic value of an individual's skills and talents. In other words, it's a way to quantify a person's earnings ability.

For most people, human capital is relatively bondlike; however, the safety of an individual's human capital differs by a variety of factors. One important factor is how diverse and dynamic your economy is (i.e., your job prospects).

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If you live in an area that is growing and vibrant, it will likely be easier to find a new job, should you need to.

This generally means more human capital—meaning higher wages—and safer human capital, because the ability to replace wages will be higher. As a rule, the larger and safer your human capital is, the more aggressive you can be with your investment portfolio.

Real estate risks

Real estate is another important consideration. While real estate has tended to be a relatively safe investment historically, its riskiness can vary depending on the economic diversity of the city and the amount of equity in the home.

For example, people who own homes in economies that aren't as likely to grow (i.e., aren't "business-friendly") may need to have more savings or more conservative investment portfolios should they need to sell their homes and move.

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Similarly, younger investors who own homes are more susceptible to housing price changes because they own a lower percentage of their homes. For example, a 10 percent increase, or decrease, in a house's value would be a 50 percent increase or decrease in equity for an investor who recently bought the house with a 20 percent down payment. Therefore, investors who owe more on their mortgages will want to be more conservative in their investment portfolios.

Double whammy

Finally, for many people, the riskiness of their human capital and their real estate assets may be related. For example, someone who works in an economically undiversified area faces the potential "double whammy" of not only losing his or her job if a key employer goes out of business but also facing depressed real estate values if other former employees are forced to sell at the same time.

Even if you work in a job that is unrelated to the primary driver of the local economy—for example, you work for a restaurant, while the local economy is dominated by the technology industry—you may still be affected if that sector takes a swing for the worse.

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The expression "Location, location, location" is often used to describe what's important to think about when buying real estate, but it's also an important consideration when building a portfolio. There are obviously many things to consider. But, in general, the brighter the prospects for your region, the more aggressive you can be with your financial assets.

—By David Blanchett, certified financial planner and head of retirement research at Morningstar.