Are You A Stock Or A Bond?

6/23/2014


In reviewing your portfolio, it's important to remember a key asset — you. After all, for those of us not yet retired, a significant part of our wealth is what we have yet to earn.

With that in mind, investors should consider not just financial assets, but also their human capital — the current value of future wages. Human capital tends to transform into financial capital over the course of a career. Fresh college graduates sit at their peak of human capital and likely at the bottom for financial capital. In contrast, boomers reaching retirement approach their peak for financial capital after nearly depleting their human capital.

No asset should be viewed in isolation. Return potential, volatility, and correlation to other assets are crucial elements for constructing a well-diversified portfolio. And for most of those still a long way from retirement, no asset trumps human capital. So it seems wise to evaluate whether the traits of that human capital more closely resemble stocks or bonds, and whether we should adjust our investment style accordingly.

Consider people with secure, highly stable jobs — tenured teachers or government workers, for instance. With the prospect of termination remote, their paychecks are highly stable, similar to the interest payments received from a bond. To diversify their total portfolio, they can seek riskier assets, such as stocks. To varying degrees, most people fall in this category, since human capital is usually viewed as less risky compared to stocks.

Then there are workers in highly cyclical industries. Or those who rely on performance-based bonuses for a big chunk of their compensation. Or stockbrokers, whose pay and job security may ebb and flow with the stock market. Such careers more closely resemble the volatility of stock returns. To diversify against career-related risks, it may be prudent to put a larger portion of financial assets in the relative safety of fixed income.

Of course, workers with high earning ability can more easily recover from financial losses, allowing them to accept more risk in their total portfolio. But, all else equal, the schoolteacher should invest a larger portion of his financial assets in stocks than the carpenter.


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com