When most people think about asset classes, they tend to think about things like stocks, bonds, real estate, and commodities. Investment advisors spend countless hours researching the risk/return profiles and correlations of these common asset classes in an attempt to construct efficient invest꧋ment portfolios for their clients.

But if you're a young to middle-aged investor, the importance of these asset classes pales in comparison to an asset class called 澳洲幸运5开奖号码历史查询:human capital. Human capital is 澳洲幸运5开奖号码历史查询:intangible and can't be purchased or sold directly. For this reason, it does not get much financial press. If you are between the ages of 18 and 50 (or you still act like you are), t🐲hen you may be interested in what human capital can do for you in addition to how you ℱcan use it to grow and protect your financial capital.

Human Capital for Investors

If you learned about human capital in business school, it was probably defined from a business owner's perspective. But it doesn't necessarily mean the same thing for investors. So how do they define human capital?

To an individual investor, human capital is the 澳洲幸运5开奖号码历史查询:present value of all future wages. When you are young, it's probably the most valuable asset you own. Human capital is also your best protection against 澳洲幸运5开奖号码历史查询:inflation. With a strong professional skill set, you will always com📖mand a fair wage, no matter how inflated your local♔ currency becomes.

Anything you do to increase your ability to earn higher future wages could be considered investing in your human capital. The monetary and time-consuming investments you make early in life, like 澳洲幸运5开奖号码历史查询:getting a higher education, doing on-the-job training, and learꦬning better social skills c𒀰an increase your personal human capital.

Human capital should be considered an asset class that's part of every portfolio. While illiquid and non-tradable, human capital should be a key driver for the portfolio needs of an investor and should be hedged by financial capital rather than the other way around.

Companies Capitalizing on Human Capital

As noted above, human capital means different things for different people—it just depends on who it impacts. And it's important to know just how they differ.

When it comes to companies and businesses, human capital refers to the value of an employee's skills and experience. This value is the economic value. This is passed on to the employer or company. Because it's intangible and can't be expressed in a dollar value, it doesn't show up on the 澳洲幸运5开奖号码历史查询:balance sheet. Some of the characteristics employees bring to their employers include education, skills ✤and training. Even traits like punctuality, neatness, loyalty, and leadership count toward a company's huma🐟n capital.

Since employees aren't necessarily on the same level, employers can increase their human capital by investing in their pool of personnel by offering advanced training and education. This allows every worker to provide an economic value for their companies.

Human Capital and Financial Capital

Over your lifetime, your human and 澳洲幸运5开奖号码历史查询:financial capital should🍬 go in opposite directions. When you first start out in yo💝ur career, you have years of earning power that await you. But your financial capital is low because you probably haven't saved very much. As you age, you have the opportunity to use your human capital to increase your financial capital. It is an opportunity because financial capital is not a given, rather it is earned through wages, savings, and smart investment decisions.

During your working career, the risk characteristics of your human capital should affect how you allocate your financial capital. Factors like job stability, income 澳洲幸运5开奖号码历史查询:volatility, and the industry in which you work should all be considered when selecting an 澳洲幸运5开奖号码历史查询:asset allocation for your financial capital.

It is also important to keep in ꦜmind that human capital’s correlation with the stock market is a key element of asset allocation and should not be overlooked when making any type of investment decision.

Below are two examples of how the risk characteristics o♋f your human capital can affect the asset allocation of your financial capital.

Investing in Company Stock

A highly specialized chemical engineer working in the oil industry would not want to have a portfolio heavily weighted in the energy sector, or even his/her employer's stock. Career specialization makes human capital concentrated and risky, from an industry standpoint. As such, the engineer can compensate for this risk by investing his/her financial capital in industries and companies with little or no 澳洲幸运5开奖号码历史查询:correlation to his/her human capital.

For example, investing more of his/her financial capital ꦺinto sectors like health care or tele🅰communications, could offer diversification and help him/her better manage the overall risks of her investment portfolio.

Income Volatility and Investment Risk

A real estate broker faces more human 澳洲幸运5开奖号码历史查询:capital risk than a pharmacist. The real estate broker may have a higher appetite for financial risk, but his wages are more volatile, more difficult to replace and less secure than the pharmacist's. This extra risk makes the broker's income stream less valuable. All else being equal, he/she should compensate for this extra human capital risk, by owning a higher percentage financial assets that are less volatile and more liquid relative to the pharmacist's.

Protecting Your Human Capital

Like any other asset class, there are risks associated with your human capital. The two main risks are death 🃏or disability ♚risk, and professional competency risk.

Death or Disability Risk

When you are a young adult, it is very important to protect your human capital with both life and 澳洲幸运5开奖号码历史查询:disability insurance policies. Doing so will protect you and your family against a possible human capꦕital shortfall that may arise from an untimely death or a career-halting illness. This is especially true if your expected future financial obligations are high.

As you get older, your need to hedge your human capital with insurance should decrease. Decisions regarding protecting your human capital with life and disability insurance should be made in conjunction w🔯ith the overall asset allocation decisions in your investment portfolio.

Professional Competency Risk

Your ability to earn future wages depends heavily on your professional competency. Becoming too comfortable with your career cไould pose a hidden risk to your♛ human capital. Like many other valuable assets, human capital needs to be constantly monitored. You should always have goals for life-long learning. Make sure you stay current with industry trends and new technologies to protect against this risk.

The Bottom Line

To young and middle-aged investors, human capital offers inflation protection and is a very important asset that should not be overlooked. All investment decisions should take into account the characteristics of both your human and financial capital. Your human capital should be protected with insurance. Always remain open to further investment through more education and on-the-job training. Understanding human capital assists in capturing the entirety of an investor’s unique risks, returns, and constraints—characteristics that are fundamental for effective 澳洲幸运5开奖号码历史查询:portfolio management.

Famed investor 澳洲幸运5开奖号码历史查询:Warren Buffett once said, "The best investment you can make is always in yourself." It has never been a good idea to be on the other sid𓃲e of Mr. Buffet𒈔t's trade.