Managing Your Human Capital Risk for the Long Haul
By Michael Evans
If your life’s calling were an automobile, which would you be: A fast-paced Ferrari, tech-savvy Tesla or stalwart Subaru? Whether your career — your “human capital” — is turbo charged or fuel efficient, it’s important to integrate its potential risks and rewards with those found in your personal investments to achieve a smoother financial ride.
Considering Your Human Capital
Your human capital is the asset you bring to your overall wealth in the form of income-generating opportunities. BAM ALLIANCE Director of Research Larry Swedroe offered some insights on planning for human capital as an integral component of your wealth in an August 2013 CBSNews.com blog: “Not only do we need to define the magnitude of one’s human capital, but we also need to consider its variability. Some businesses and professions are highly cyclical.” He also noted, “Other professions have very stable incomes as their ability to generate income has little or no correlation to the economic cycle.”
As examples of each, contrast the relatively stable career of an Ivy League professor to that of a professional athlete. High-energy corporate executives, business owners and other professionals also fall into the category in which their careers are often highly correlated with stock market and economic downturns. In other words, if the markets and/or economy plummet, odds are their careers will be jeopardized as well.
The solution is to offset your human capital risks with an investment portfolio that’s been customized to lower these usual correlations. If your human capital is highly correlated to market or economic cycles, consider taking less equity (stock) risk and more fixed income (bond) stability. Vice-versa if you are in a less cyclical career.
Investing Your Human Capital
There also are the proceeds of your human capital to consider. As career opportunities pay off in the forms of salaries, bonuses and other types of compensation, you rightfully look for ways to invest these. Or, often, those “ways” come looking for you in the form of stock options (employee stock ownership plans), private placement preferred loans, company stock and a variety of outside investment ventures.
The catch is, many of these “opportunities” can be booby-trapped with high doses of single-holding risk. As long as your company is on a roll, you may feel that your company stock is golden. In reality, you have little control over macroeconomics, business decisions and a host of other factors that could spell the end of the road if your wealth is overly concentrated there. You can’t know the unknowable, so there’s not much you can do to prevent the day that your company announces its stock has plummeted due to an unforeseen event. Suddenly, your investment vehicle has stalled, if not gone into reverse.
Diversify Your Investments
That’s the cautionary news. Fortunately, there’s good news, too. You actually have a great deal of control over preserving your personal wealth by harnessing the powers of diversification and asset allocation. Properly diversifying your personal wealth around the world and away from your company holdings is usually sound advice for investors from all walks of life and especially sound for those in high-end careers.
In other words, that crash-tested Volvo of a low-cost, evidence-based and globally diversified investment portfolio may seem ho-hum compared to glamorous stock options and hot real estate ventures, but it’s far more likely to adeptly transport you to your desired destination.
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