When you are young, your human capital (wage-earning) should be integrating into the overall financial plan. When developing the asset allocation, young investors should invest more into stocks due to the fact that human capital is at its highest point. Larry Swedroe explained is his new article, Understanding Different Types of Risk:
We can define human capital as the present value of future income derived from labor. It’s an asset that doesn’t appear on any balance sheet. It’s also an asset that is not tradable like a stock or a bond. Thus, it’s often ignored, at potentially great risk to the individual’s financial goals. How should human capital impact investment decisions?
The first point to consider is that, when we are young, human capital is at its highest point. It’s also often the largest asset young individuals have. As we age and accumulate financial assets, and our time remaining in the labor force decreases, the amount of human capital relative to financial assets shrinks. This shift over time should be considered in terms of the asset allocation decision.
When young investors develop the investment portfolios, you should consider having more into stocks with high human capital and longer time in the labor force. As you age, you should gradually shift your asset allocation more into bonds as your time remaining in the labor force decreases.
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