Sterling Thoughts Newsletter
Sterling Thoughts is our quarterly newsletter full of original content on everything related to financial planning. We hope you find it informative and educational.
Sterling Thoughts Summer 2018
Your Human Capital – Are You a Stock or a Bond?
When it comes to making money, there are only two ways. First is the ability to generate income through work (which we call human capital) and the second is the ability to generate income through investments (which we typically call personal capital). Unless you are fortunate enough to inherit a large amount of wealth, you normally need to work so you can pay your bills. When you are just starting out in your career, the emphasis is to grow your job skills (your human capital) so that you can make more money and start creating personal capital or savings. Usually this means putting money into your employer’s 401(k) or something similar.
Why do we need personal capital? Because the ability to work or generate human capital is finite. At some point in the future you will either want to stop working (retire), or due to age, health, job elimination or several other reasons, will be unable to work. Unless you have built up enough personal capital to make up for the lost human capital, your lifestyle is reduced. The concept of saving for retirement is to eventually build up enough personal capital so that human capital is replaced and no longer needed.
We are all aware that investing personal capital involves risk of loss, and our role as your financial advisor is to help create a portfolio that has only enough risk to help you meet your goals and that is within your risk tolerance. By having the appropriate mix of stocks, bonds, cash and real estate, we can create a portfolio that should accomplish this task. Something that is not often considered is that your human capital also has risk associated with it. When creating your portfolio, we need to evaluate the risk associated with your job and take that into account.
Not all jobs are created equal. Some can be high risk and high reward such as those in sales, construction, self-employment or as corporate executives. With these types of careers, compensation can be high but also carry the risk of reduced income due to poor sales or job elimination. Many of these types of jobs can also be “feast or famine” with irregular cash flow. If we are looking at the risk associated with these careers, they look very much like a stock with fluctuations and the loss of income altogether.
On the other hand, there are careers that provide stable income and reduced risk of job elimination, but usually at the expense of higher income or wages. Examples of these might include tenured teachers or professors, government workers, skilled union workers and certain business owners. These careers look much more like a bond as they provide stability and security in exchange for reduced income.
The type of career you have plays an important role in designing your portfolio pre-retirement. For those of you who have a more stock like job, your personal capital portfolio needs to be more conservative to account for the additional risk with your human capital. On the other hand, if you have a more bond like career with stability and security, your portfolio may need to have additional risk to provide larger growth opportunities.
At Sterling Wealth Partners, we take a holistic approach to investing which means we consider your human capital in our portfolio construction. So, are you a stock or a bond? Either way we can help you create an investment portfolio that is appropriate for your individual situation. For an independent, objective portfolio analysis please contact our office to schedule a consultation.
Securities and advisory services are offered through, USA Financial Securities Corp. (Member FINRA/SIPC). USA Financial Securities is a registered investment adviser located at 6020 E Fulton St., Ada, MI 49301. Sterling Wealth Partners, LLC is not affiliated with USA Financial Securities.