By Ryan Velez
What’s the key to having a good portfolio? Diversification. If you want to put it more simply, don’t put all your eggs in one basket. For example, if you put all your money into one stock, what happens if that stock collapses? You may have had a lot of money at one time, but that counts for nothing now. With cryptocurrency being a hot commodity, many people see this as the answer, but Black Enterprise points out that human capital is not to be ignored.
What is human capital? Think of it as the present value of all potential earnings during an individual’s lifetime. So for instance, the compensation you expect to receive during your lifetime is considered your specific human capital. In addition, it is a conventional asset and can be seen as safe or unsafe. A tenured professor at a university may be deemed to be “safe” human capital because he has a steady stream of income. Therefore, it may be more appropriate for that professor to invest in riskier assets, such as stocks. However, what if you were a freelancer or someone who works on commission? Your income is a bit more unsteady and is likely an unsafe asset. They may want to invest in something safer, like bonds.
Of course, there are other inherent risks to human capital, just like stocks or any other investment. Human capital is exposed to both earnings and mortality risks. Some things an individual can do to reduce his earnings risk is to establish an emergency fund or create a credit line to withstand periods when there is a disruption of income. Chances are that many people with good financial habits already do this, but if you haven’t gotten started yet, now is likely the time.
There’s also the matter of mortality risk. This is the chance an individual may die prematurely at a time when their dependents need their financial contributions the most. Maintaining life insurance is one way to address this concern as it helps protect against the risk of depleting human capital at the time of death.
So, when planning on how to handle your human capital, be sure to take a look at your personal earning power and situation. Doing this now could provide the means for future generations to succeed.