Your Human Capital

An interesting article in the Wall Street Journal today highlights the part that you as an income-earner play in your overall investment diversification strategy. I have not read the article thoroughly, but am familiar with the concept, as the CFA Institute published a monograph on the topic about 3 years ago. The idea makes sense, and we use the concepts routinely in working with clients.

The bottom line is that a persons career can resemble either a risky or riskless asset at various stages of life. For example, a 22 year-old college graduate in a first-year sales position may have a lot of career risk and income volatility. Depending on this person's overall financial situation, he or she may not want to take on a lot of investment risk in their 401k or savings program. We typically advise new graduates to invest in safer, less-risky assets until they have the necessary liquidity, emergency and "house down payment" funds established.

A research scientist or tenured educator may have a lot of career stability, but maybe not the potential for outsized income, like the salesperson may have at various times. So the more stable income-earner may want to take more risk in her investment portfolio, even though they mentally may not be a risk-taker.

Therefore, you may personally resemble a stock or a bond, depending on the stability of your career and your income (as well as a few other factors, such as the adequacy of your life insurance, investment assets, etc.). If you resemble a stock, the case can be made to lighten up a little bit on equities in your investment portfolio. If you resemble a bond, perhaps growth assets like stocks should have more of a weighting.

Don't overlook your career situation when implementing your investment strategy.

--Doug