What are the three most important things in investing? Allocation, allocation and allocation. That's gospel in the financial planning business. It's not your stock selection that really matters. It's the percentage of assets you have in stocks, bonds and cash. A finer-grained version considers allocations to U.S. versus foreign stocks and short- versus long-maturity bonds. Even here, investing is regarded as all about categories.

This advice from financial planners is well and good, but it doesn't go far enough. In an era when individuals are largely left to sink or swim on their own financially, you need to go beyond the usual exercise of slicing up portfolios into types of assets and instead allocate your entire life.

The question you should be asking: How do other aspects of my life--my career, home, marriage, pension and spending--affect my financial well-being?

Be forewarned that some of what follows is unorthodox, and planners are somewhat hesitant to endorse the conclusions. What they do agree on is the importance of understanding risk tolerance. In other words, it's important not only to devise a strategy that makes sense to you on a sunny Sunday afternoon but also to create an investment portfolio that you'll stick with during times of economic stress.

"The most successful investment strategies are the ones that keep people in their seats when the market goes down," says Michael Kay, an adviser who runs Financial Focus in Livingston, N.J.

Here are four sources of financial risk and how to reduce them.

### Career risk

Your biggest asset is almost certainly one that doesn't show up on your bank or brokerage statements. It's your earning potential. The simple rule here is: Don't make this risk worse by owning stock in your employer. If the company sinks, you're out of a job and in the poorhouse.

If your employer is offering its own stock as part of your 401(k) plan, reject it. If stock is given to you, sell it as fast as you can.

"It's not uncommon for people, on purpose or by accident, to accumulate the lion's share of their net worth in company stock," says Jonathan Satovsky, a financial planner in New York City.

One of his clients was loaded up with shares in his employer, Lehman Brothers ( LEHMQ - news - people ). "It's a sad story," says Satovsky. "I begged him [to sell]. He fired me. He lost it all. He got divorced."

More radical than lightening up on employer stock is the notion of taking an outright bearish position in the industry where you make your living. If you work in Silicon Valley, says Satovsky, you could buy some out-of-the-money puts on the Technology Select Sector SPDR, an exchange-traded fund (ticker: XLK). If the sector goes through the same sort of shakeout it did beginning in 2000, this long-shot bet would provide you with a cash payout to cushion the blow.

Puts on the ETF that mature in March were recently quoted at a price where a $1,000 investment endowed the owner with options whose combined strike price is $120,000 on shares now worth $150,000. That means if the shares crashed 50% these options would provide a $45,000 cushion. More likely, they'll expire worthless. The point isn't to buy the puts expecting a payout. Instead, look at them as offering the same sort of protection for your career that fire insurance does for your home.

Suppose you and your spouse both work as architects. That means your household income is completely tied to the real estate market. Consider cutting the financial damage you'll suffer in an industry rout by investing in puts on the SPDR S&P Homebuilders ETF (XHB).

You work at Citigroup ( C - news - people )? Maybe you should own some long-dated put options on its stock. Citi is trading near $4.40. January 2012 puts, which confer the right to sell shares for $2.50 each, were recently quoted at 13 cents a share. It wouldn't be a very loyal investment, but how loyal was Citi toward the 20% of its staff that it axed in the last bank crash?

Laurence Kotlikoff, an economist at Boston University who sells financial planning software, says employers would be doing their workers a great service by encouraging them to own puts like these, as a form of unemployment insurance. The usual practice is just the opposite.

"The way employers put employees into [company] stock is just criminal," Kotlikoff says.

### Dollar risk

Another big financial risk that many people run without even realizing it involves outsize bets on inflation or deflation.

The conventional wisdom these days consists of alarms about a bond bubble. Wise men like Warren Buffett and Martin Sosnoff are warning investors not to follow the lemmings into bond funds and Treasurys. If interest rates shoot up, they note, your fixed-income portfolio will get crushed.

If you own a lot of bonds, in other words, you're betting that prices will either remain stable or fall.

All this is true as far as it goes. A big-picture look at your dollar risks, however, must account for two other items on your balance sheet: your company pension and your home mortgage.

A pension that promises to pay a set amount each month for the rest of your life, but doesn't adjust for price changes, acts like a bond and adds to your inflation risk. If you're lucky enough to have dibs on such retirement income, the safest move is to reduce the amount you would otherwise have invested in bonds.

A fixed-rate mortgage works the other way and increases your net worth as inflation spikes. That's because you would benefit from paying off that mortgage with cheap, inflated dollars. Other things being equal, homeowners with fixed-rate mortgages should have more bonds in their retirement accounts.

Now put these three pieces of the financial puzzle--bonds, pension and mortgage--together in a hypothetical example. Harriett, age 52, has just refinanced her house with a $400,000 mortgage at a fixed 30-year rate of 4.25%. Her pension credits so far entitle her to $2,000 a month beginning at age 65. Harriet has invested the entire $600,000 in her 401(k) in stock funds.

The calculator at immediateannuities.com tells Harriet that in 2023, the year she turns 65 and plans to retire, her pension will be worth $354,000. That's how much a 65-year-old woman will have to pay (assuming no change in interest rates) at that time to buy an annuity paying out $2,000 a month for life. Discounting that future sum at a 5% rate yields a present value of $188,000 for Harriet's pension today. In other words, her pension is the financial equivalent of owning $188,000 worth of very long term bonds.

On balance Harriett is making a big bet in favor of inflation. She has bondlike assets of $188,000 and a bondlike liability of $400,000. To be neutral, she should move perhaps a fourth of her retirement account into bond funds.

What happens if inflation and interest rates creep up over the next decade? The bonds will do badly for Harriett. But her fixed-rate mortgage will offset that with a nice windfall as the value of her house and equity in it rise and the debt remains unchanged.

Michael Kay is a skeptic on asset and liability matching. How, he wonders, are his clients going to react in a bond bear market? Their rising equity in their homes may be cold comfort when they open their 401(k) statements and see big losses.

He's got a point. But you should also think about how you will react if the dollar goes the other way. Are you equipped to survive a bout of deflation, when your mortgage payments become more painful? It would be nice to have a rising bond fund to offset the damage.

One subtlety here is that neutralizing a balance sheet to the effects of inflation involves factoring in not only the dollar amounts of assets and liabilities but also their duration--or how long it takes for an obligation to be repaid. As it happens, a 30-year 4.25% mortgage has a duration of 13 years. So does the Vanguard Long-Term Investment-Grade bond fund. Harriett's pension has a duration that's considerably longer.

### Real estate

Conventional wisdom: Allocate 5% of your investment portfolio to real estate investment trusts. They give you a stake in rental income streams and hold up well during inflation.

Here's a refinement on this concept. Consider what real estate you own outright. If you own one home, putting 5% of retirement assets in REITs is fine. If you own two, cut this allocation to 0%. If you are a renter, put 10% of your savings in REITs.

### Spending

An unorthodox view: Your spending habits should influence your investment portfolio. You should look for ways to offset the cost of living.

Do you wince when you pull up to the gas pump in your Escalade? Then it's time to pick up a few oil company shares. Invest as much as you did in the car. Henceforth you can be indifferent to the price of crude.

Getting on in years? Terrified of medical bills? Invest in the Vanguard Health Caresector fund.

The point is not to beat the market--who knows how Exxon or that fund is going to do? Instead, seek equanimity in an economy that is full of risk.

This in the end is what allocation is all about. Says Satovsky: "Asset allocation is not intended to make you the highest return. It's to protect you from the unknown, and from yourself."