When it comes to investing, you might assume that you should model your portfolio after your peers’—even if you have a different type of job and income.
But new research from Morningstar Investment Management suggests there’s more to consider when optimizing your portfolio, namely accounting for your human capital, or your potential to earn a living over time.
It makes sense: Your ability to invest and save for your future is largely dependent upon your ability to earn money.
One way to account for your human capital is to sync your career and your investment strategy. For example, people with relatively stable jobs, like government employees or tenured professors, may be able to take a riskier approach to their investments (because their income is very predictable), while those in high-risk industries, like lodging, should be more cautious (because their salary often changes as the economy fluctuates).
Moshe Milevsky, a finance professor at the Schulich School of Business at York University in Toronto, describes these careers as either “bond-like” or “stock-like.”
People with stable, bond-like jobs might consider investing more money in stocks with increased risks and put less money into their short-term emergency funds. Those with more volatile, stock-like jobs, however, might consider placing more money into bonds and save more for retirement than they predict they’ll need.
If this concept is new to you, you’re not alone. Even money experts often fail to think about an individual’s total wealth when giving advice. “Many financial advisers don’t consider these other assets [like human capital],” Philip Straehl, senior research consultant at Morningstar and co-author of the research paper, told MarketWatch.
Another issue is that people misjudge the amount of money they’ll be able to earn in the future. Although many think their income will continue to increase, salaries typically peak at age 39 for women and 48 for men.
If you’re thinking about investing, there are some other basic factors to take into account besides your career type, including the amount of credit card debt you owe and the size of your emergency fund.