Human Capital = your ability, your knowledge, your earnings capacity over your working life. More precisely, it is the present value of an individual's future labor income.
Guess what? This is an asset. It is an important one, too. It also needs to be considered when you are deciding how much to invest in stocks versus cash, bonds and alternative assets.
As Alan Lavine wrote in a May 2007 issue of the NAPFA Advisor journal, "...if human capital is viewed as an asset...its level of risk must be considered..."
How stable is your job? Your income? Besides job loss there is also the possibility of death or disability that can affect this asset. Insure against these obstacles.
Recent Research by Zvi Bodie (professor at Boston University and author), mentions that "...human capital is predominately stock-like [early in one's career] and becomes more bond-like [later in one's career]...and accounts for 80% of a worker's total wealth..."
Human capital declines in importance as you get older and accumulate home equity and investable assets.
For example, if your income earning ability is:
(1) Risk-laden, [new job] then you might want to consider having some safer investments [an emergency fund] to offset potential job loss; and insure this asset against death and disability issues
(2) Stable, then you may be able to be less risk-averse
(3) Coming to end (close to retirement, for example), then this human capital has become more bond-like and will need to be replaced by safer investments
This is why when you are young, an emergency fund and appropriate insurance are so important since the human capital asset is such a large portion of your life and at-risk.
It is also why having some safer investments in your portfolio become more important as you near retirement. But, being too conservative is also a danger and why balance comes with a full understanding of your income needs in retirement.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.