One of the most persistent mistakes investors make, often with devastating consequences, is the failure to consider their human (labor) capital when constructing their portfolios. In fact, while human capital can dominate a portfolio (especially in the case of younger workers who have limited financial capital), it’s an often-ignored component of an individual’s wealth. The reason for this oversight is that human capital doesn’t appear on any balance sheet. The problem is so pervasive that, in my experience, it’s the rare financial advisor that even considers human capital in their asset allocation recommendations.
What you’re worth
We can define human capital as the ability to earn income. 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, and are thus highly correlated to the economic cycle and the risks of owning stocks. Good examples of professions that might fall into the high correlation category are automobile and construction workers. Other professions have very stable incomes as their ability to generate income has little or no correlation to the economic cycle. Good examples of occupations that