‘Human Capital’
(NewsUSA) – Age doesn’t single-handedly dictate an investor’s stock-bond blend. Instead, an investor’s current savings versus future potential savings should set the mix, according to financial experts. On average, asset allocation is the most important choice an individual investor will make. For most people, the amount they dedicate to stocks versus bonds will drive returns more than which mutual funds are picked and when they are bought or sold.
“A good approach to asset allocation is to think of wealth holistically, as both the money you currently have in your portfolio dedicated to retirement, which we call financial capital, and the potential money you will save over your lifetime for retirement, which we call human capital,” says Roger Ibbotson, professor of finance at the Yale School of Management and founder of Ibbotson Associates. “Human capital is like a conservative bond investment, and the goal is to balance it out with your financial capital.”
Here are a few asset allocation rules of thumb:
For aggressive investors:
* Younger investors, who usually have more human capital, should invest more of their savings in stocks than older investors who have significantly more financial capital. * Investors with a secure income stream can invest more of their financial portfolio in stocks. * People who are savers versus spenders have greater human capital and can invest more aggressively.
For conservative investors:
* Individuals whose income stream is highly correlated with the stock market, like financial planners or portfolio managers, should consider more conservative financial investments to diversify their total wealth portfolio. * Workers whose skills are highly specialized and can’t easily change careers should their fields become obsolete, may also want to invest more in bonds. * Investors who think they might leave the workforce should consider investing more conservatively.
When setting an asset allocation, start by evaluating both the amount of money you expect to save for retirement over your lifetime and the factors that can derail your plans. Then develop an asset allocation for your financial wealth that balances your human capital profile.
