Wednesday, March 01, 2006

Risk: Your Human Capital - Stock or Bond?

Professor Moshe Milevsky of the Schulich School of Business asks whether you are you a Human Bond? Or Speculative Stock?

Professor Milevsky does work in the emerging field of Quantitative Wealth Management, trying to help individuals make more rational and better decisions about personal wealth and risk management issues.

Milevsky writes about "You Inc." in Wealth Logic: Financial Planning for the Smart Investor and suggests that the most significant financial portion of "You Inc." is not your accumulated financial wealth in terms of stocks, bonds, 401(k)s, real estate equity, etc. It is the amount that you will be worth as an earning machine over the lifetime of your working career. What he calls your "Human Capital".

Milevsky suggests that you stop and consider what type of capital you are personally and, in the interest of a balanced portfolio, purchase or weigh your other financial investments to offset the type of risk inherent in your "human capital". For instance, Milevsky states that as a tenured professor himself, he's the equivalent of a "human bond". Steady, regular and reliable payments, practically no matter what. In the Quantitative Wealth Management field, Milevsky suggests that this should be offset by a very high ratio of investment into the stock market, rather than into more bonds or other savings type investments. And this is exactly what he himself does.

I also know another individual like this - he's got a very secure government job as a middle manager - another "human bond" - but he's very conservative and probably doesn't invest for the rate of return he should be seeking on those investments, given his "human bond" characteristics. On the other side of the coin, Milevsky suggests that those whose job is more like a volatile speculative stock - a commission salesperson of "big ticket items" comes to mind - should probably invest a higher than average ratio into more conservative investments.

Interesting stuff. Human Bond, Blue Chip Stock, Speculative Stock? What's your "Human Capital" most like?


The Confused Capitalist

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