On Factoring Human Capital into Your Investment Process

The concept of “human capital” is often overlooked in portfolio management for individual investors. In this context, human capital would be considered the “value” of a person’s future earnings potential – or the hypothetical dollar amount someone would be willing to pay today, in return for your future pay checks between now and retirement.

The value of our human capital is generally the product of how much we expect to earn from our jobs over time, and the “risk” of earning less. Since the average person’s wages generally rise with inflation, and the risk of indefinite unemployment is relatively low, human capital may share a lot of the same characteristics as bond investments. This is one reason why younger investors can generally afford to take greater risk on their money – their overall wealth consists mainly of their future earnings compared to the assets they’ve accumulated.

Who should consider human capital more seriously? Generally, those:

  1. With risky careers, i.e., commission-only sales job.
  2. Working in highly cyclical industries – resulting in potential layoffs or lower income during a weak economy.

Some examples of how human capital can be used in the investment process:

  • Avoid making big investments in the stock of companies in your industry. This is particularly true for those with significant stock options.
  • Carry more cash or lower risk investments
  • Buy portfolio insurance i.e., derivatives, etc.

Everybody’s situation is different. If you’re interested in learning how this might relate to your specific situation, please send me an email at Michael.carbone@raymondjames.com or give me a call at 978-455-7799.

Thanks for reading!

Michael Carbone, CFA, CFP®
Financial Advisor, Raymond James

Investing in fixed income securities (aka “bonds”) involves certain risks such as market risk, if sold prior to maturity, and credit risk, especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility. All fixed income investments may be worth less than original cost upon redemption or maturity. Bond prices fluctuate inversely to changes in interest rates. In other words, if interest rates rise after your purchase, you may receive less than your purchase price should you liquidate early, and vice versa. Bonds provide a fixed rate of return if held to maturity.

Stocks offer long-term growth potential but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations and the potential loss of principal.

Any opinions are those of Michael Carbone - not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we not guarantee that is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected.