More and more often these days, I see people trying to cram their entire financial lives into a stock/bond asset allocation.
For example, a recent retiree might count his Social Security as a bond (because it provides income) and his house as a stock (because its value bounces around a lot). And this is done for the purpose of adding everything up to check that his asset allocation matches the recommendation from a rule of thumb or online calculator.
But So What?
The above approach seems entirely backward to me. Asset allocation is not a goal. Asset allocation is a tool to help you meet your goals.
For example, our hypothetical retiree might know that he needs $45,000 of income per year. From that, he can subtract any non-investment income (e.g., Social Security, pension, part-time work) to determine how much income he needs from his portfolio. Then, he can select an asset allocation that he believes is most likely to satisfy the required level of income without taking on an unacceptable level of risk.
In other words, first look at your overall financial picture (necessary expenses, available sources of income) to determine what gaps will have to be filled by your investments. Then you can use asset allocation-related tools (online calculators, historical studies, rules of thumb, etc.) to design a portfolio that’s likely to fill in those gaps.
The purpose of asset allocation is to help you fit your portfolio into the rest of your financial life — not the other way around.