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The article investigates human capital and its correlation with investing and financial planning. Successful asset allocation highlights a stock/bond question that human capital is associated with bonds and stocks, and that a holistic view of assets is needed when planning. In this regard, a stable job relates to characteristics of a bond, but a volatile and unpredictable area of work stresses those of a stock. Our life stage indicates different trends in terms of both human and financial capital. The young have a lot of human capital, but not much financial capital. As for the older, they tend to have a lot of financial capital, while they have used up human capital.
Human capital serves as the data used in the analysis. It is understood as an individual’s skills, knowledge and experience, which are viewed in terms of their value to a company. Byrnes (2010) claims that it is the current value of our long term earnings, and along with our financial capital or savings it equals our total wealth. Assessment of human capital is based on age, a person’s risk tolerance and job characteristics, which present the methodology of the study.
The description of a bond is based on three characteristics. Firstly, young people possess a lot of potential, are capable of performing well at work and have a long-term horizon to earn. As regards the age, the young are characterized as growth stock, which explains an increase in capital value rather than yield high income. Also, they can cope with the volatility of aggressive investments and thus hold their financial capital. Secondly, younger investors have a lot of time ahead to compensate for losses, which explains less influence of a person’s risk tolerance. I personally support the viewpoint that it is vital to be aggressive with investments when you are young. Thirdly, people in stable jobs are not subject to job cuts in the period of stock market and economic turmoil. The example includes policemen, firemen and tenured professors. As a result, human capital itself is related to a bond, and young people have more of it than older investors.
The features of the bond can appeal to an individual’s personal beta. The beta describes how responsive jobs are to stock market changes and explains a degree of risk embedded in our financial outlook. If a stock has a beta of 0, it indicates that drops in the market do not impact the livelihood. In the case of 1, the market and stock trends coincide. In addition, the value above 1 stresses falls in both the market and stock, whereas a beta below 1 shows that the stock will not move as much as the market. As for a personal beta of 2, a 25 percent decrease in the market leads to a 50 percent fall in the paycheck. It is a good idea to review the paycheck over the last few years to find out the personal beta. These observations about a personal beta may correspond to specific features of a bond: a junk bond or a Treasury. In the former case, the bond relates to a high-risk security with a high yield, while the latter case refers to an interest bearing bond.
The next concept about human and financial capital emphasizes insurance decisions. Namely, life insurance is significant at a young age although young people tend not to think about it at all. This approach should be changed, since the protection of an individual’s unearned income and valuable human capital are necessary. On the other hand, the insurance decision should be well elaborated in terms of the individual’s financial strengths and the insurance company’s record. This idea can prove that the population may not be fully aware of the possible risks inherent to the market, inflation, mortgage and health. The risks prove volatility of the market and emphasize how important it is to review human and financial capital.
References
Byrnes, N. (2010, December 15). Are you a stock or a bond? Reuters Money. Retrieved from http://blogs.reuters.com/reuters-wealth/2010/12/15/are-you-a-stock-or-a-bond/
