Are You a Stock or a Bond?

What is the largest component of your total wealth? Your brokerage account? Your retirement account? For many people, the biggest part of their wealth lies in their ability to earn income in the future.

Human capital is the present value of your future labor income. Some people's jobs are like a bond. A tenured professor can reasonably rely on a fairly steady stream of income over time. Other jobs are more speculative, like stocks. Working at a high tech start-up may lead to a large pay-off, but the business could just as easily go bust.


When considering investment decisions, almost all of the analysis focuses on financial assets, while human capital is typically ignored. Those advocating the inclusion of human capital in the asset allocation process suggest that if your job is like a bond, then you can invest more heavily in stocks. Conversely, those who lack a stable income may wish to employ a less aggressive approach with their investment portfolio and tilt more towards bonds.

While this concept makes sense, it may be psychologically difficult to implement. As Christine Benz of Morningstar points out, a sharp decline in the stock market can often cause much concern. The fact that someone's employment may be like a bond does not necessarily make that person feel any better when his stock-heavy portfolio drops. The theory may not keep pace with emotions.

The financial advisor Michael Kitces believes that the concept of human capital has implications beyond the allocation of financial assets. According to Kitces, if human capital is indeed a major component of wealth, than efforts to increase your income is very important. For someone in their 20's and 30's, increasing the growth rate on their human capital by 1%, with compounding of that growth over time, has a radically greater impact than increasing the return on their investments by 1%.

In the end, the biggest concern is to avoid putting all your financial assets and human capital into one basket. Many employees at the now defunct Enron and WorldCom had a large chunk of their retirement accounts in company stock. The failure to diversify meant that when their companies went out of business, the employees lost their jobs and their retirement savings.

Words of Wisdom

I used to work in a fire hydrant factory. You couldn't park anywhere near the place.
-- Steven Wright