Quizmaster, Doug Hutchinson, has come up with another great quiz for us regarding the potential effect of human capital on your investment strategy.
Good luck!
Consider this scenario:
You are having lunch with your two friends, Robert and Shawn. Robert and Shawn are the same age, had the same income last year, and they both have an investment portfolio that is roughly the same size and roughly the same allocation to equities and bonds. Robert and Shawn also share the same financial advisor, who they visited (separately) last week.
Robert is a tenured college professor with a stable job, a stable income, and he will earn a defined benefit pension. The financial advisor suggested that Robert may want to consider increasing the amount of equity in his investment portfolio.
Shawn works as a commission-based salesperson for a financial services firm. His income can be very volatile from year to year. The financial advisor suggested that Shawn may want to consider decreasing the amount of equity in his investment portfolio.
Robert and Shawn are perplexed. They don't understand why their advisor would give them each different suggestions considering they are both the same age, had the same income last year, have the same sized portfolios and have the same allocation to equities and bonds.
Why might the advisor give Robert and Shawn different suggestions?
Answer:
When constructing an investment portfolio, you can take many factors into consideration including your human capital. Human capital is the present value of the income from your working years. Think of your total wealth as the combination of human capital and your investment portfolio.
Robert's human capital could be considered more "bond-like" (a stable job as a tenured college professor with little volatility from year to year). All else being equal, Robert may want to consider increasing the proportion of equity in his investment portfolio to achieve better diversification of his total wealth.
Shawn's human capital could be considered more "equity-like" (more volatile from year to year). All else being equal, Shawn may want to consider decreasing the proportion of equity in his investment portfolio to achieve better diversification of his total wealth.
Moreover, Shawn's employment as a commission based salesman in the financial services industry means his yearly income is likely going to have a higher correlation to equity market performance than Robert's yearly income. Robert's stable income as a professor is likely going to have little or no correlation to equity market performance.
Your investment portfolio is just one part of your total wealth. To improve the risk management of your total wealth, you may want to take human capital into consideration when you make allocation decisions in your investment portfolio.
Check out another quiz from Doug's Quiz Corner!
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This quiz is intended for informational and illustrative purposes only. This material is not intended to be relied on as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The information presented is general information that does not take into account your individual circumstances, financial situation or needs, nor does it present a personalized recommendation to you. The information and opinions contained in this material are derived from sources deemed reliable, are not all-inclusive and are not guaranteed as to accuracy.
