I am reading thi sstuff on human capital. It says most individuals entering accumulation phase their human capital is more equity-like thus their financial assets should be allocated more heavily toward low-risk investments. I thought since the individual had a longer time horizon, they should be investin gmore heavily in riskier products? What the hell?
stork, The point is this: Let’s say that, for whatever reason, that the optimal asset allocation for an individual is a 70/30 mix of stocks and bonds. Looking only at financial assets you would allocate your FC into a 70/30 mix. BUT, if you include your HC into account then to get your overall capital (HC and FC) to a 70/30 mix you might have an almost entirely bond mix in your FC. This doesn’t violate the principal that if you have a longer time horizon you have the ABILITY to handle more risky investments. It is just saying RELATIVE to FC only asset allocation, when taking HC into account you will allocate FC into less risky investments. Make sense?
makes sense to me! thank you sir.
another thing to think is: hc can be both bond like and equity like in sense of correlation with bond or equity and cash flow patter. the general situation is young investor’s hc behaves like illiquid bond, but it could change. then like mwvt9 said, when you factor in both hc and fc, optimum allocation changes, then it comes down to the risk tolerance