Investment Allocation and Human Capital (are you a stock or a bond?)

Have you ever compared your career to the market? It is time to ask yourself the question; is my career volatile and risky like a stock, or is my career secure, stable and unlikely to fluctuate very much like a bond? Unless you have some sort of finance background, or just an intense curiosity, you have likely not considered this concept before, or if you have, you may not have related it back to your investment portfolio. I will provide the inspiration for this piece, as well as some resources at the end of this article. 

It is time to start looking at your career as the discounted present value of future earnings. Meaning, you should take into consideration your future earning potential, your industry and your time horizon. If you are fresh out of school, no matter what your career is, your largest asset is your human capital, or earning potential. In that way, even as a broke college graduate, your human capital is likely worth well over $1,000,000! So in essence, you have a $1,000,000 portfolio, and you need to decide where to invest it. I am oversimplifying this concept, however the basics are sound. 

Let’s say you decide to pursue a PHD and become a professor. It’s 10 years into your career and you have attained the coveted tenure. Your income is all but guaranteed until you retire, you have a great position, pension and flexibility. That is the ultimate example of your career being like a bond. Extremely low risk of income volatility, and the safety that you will be very unlikely to be fired. This person may be wise to consider a portfolio that is designed for growth. Therefore diversifying his human capital (bonds) from his investment capital (growth). What it actually is saying is that because this person’s career is so stable, they may be able to afford to take more risk in their investment portfolio. 

Consider this alternative. The year is 2012, you decide to invest your career into the trades. You get your electrical ticket and then decide to start your own business. You contract out to an oil company and work in a refinery making great money, more than all your college friends. You don't have a pension, so you decide to invest your corporate profit into an investment portfolio. Life is good, seeing as how you are familiar with the oil industry, you decide to take your excess earnings and invest them into a Canadian equity portfolio with large holdings in the oil sector. Everyone told you "you are young, you have time to recover if the market goes down", so you feel pretty confident in your financial position. Then 2014 rolls around. Oil drops from its high of $107 per barrel in 2013, and is now down to $42 a barrel in March of 2014. The oil company you were contracted with went under, and you are left with part time work where you can find it, earning less than half of your income from the year before. Add to that the huge loss your investment portfolio would have obtained. This blow would surely have been less if you had looked at the volatility of a business owner, coupled with the inherent cyclical nature of the trades, and decided to diversify your investment portfolio into safer investments such as fixed income products. To add to this, often times these volatile careers move up and down with the stock market. It may be wise to consider diversifying away from high risk investments, if your human capital is invested in a high risk career.

I need to emphasize that this approach requires individual planning. The point I am making is that you should take into consideration more than just the 2 page questionnaire your advisor puts in front of you, or your robo-advisor goes through with you online. Investment planning is much more about your personal situation. After all, you are the one in charge of your money. The right advice will help steer you in the right direction with your future. Many people have never had a conversation about how their career could effect their need for investment returns. It’s time that conversation is moved to the forefront of your next meeting with your advisor. 

For some more information on this topic, here are a few great resources: 

https://www.kitces.com/blog/investing-around-human-capital-is-your-clients-career-a-stock-or-a-bond/ 

https://www.amazon.ca/Are-You-Stock-Bond-Financial/dp/0133115291