For individuals still in their working lives, their largest asset may not be their house; or their 401(k)k; or their outside investment portfolio. No, it may well be their ability to produce a dependable stream of income month after month. Economists call this “human capital”.
“Human capital” does not appear on a net worth statement but it is usually more important than everything that does appear. The ability to produce income from a job , profession or business enterprise opens the door to being able to save and invest for the future. It is the lynchpin for building financial independence.
In setting investment strategy, we need to make certain that we diversify around our human capital. That is, if you are a cardiologist, you likely don’t need to load up on health care stocks/funds since you already have significant risk in the health care field via your job. We all recall the Enron disaster where many individuals employed there had most of their 401(k)’s invested in company stock on top of their human capital which depended on the very same firm. A big mistake – A mistake of proportions that likely cannot be repaired in most instances.
All of us like to assess our return on investment from time to time. Return on investment on human capital can be the largest of any of your assets over time if properly managed. It used to be common to have only 2 or 3 jobs in a long career. Today, even professionals move around to different firms quite often. More than ever it is important to protect the ability to earn income in order to be able to save for the future. Beware of over investing human capital in one company or one discrete area. It very likely is a risk not worth taking.