Personal Finance

You’re Worth Your Weight in Human Capital – Part 2

by Jeffrey Ryall
October 29, 2020
CFA, CFP® - Associate Portfolio Manager at Cardinal Capital Management, Inc.
October 29, 2020

See Part 1 on transforming and managing your human capital here.

Managing your human capital like a business

You probably would not be in business for long if you constantly sold your products and services for less than they were worth. Yet, sometimes the decisions we make can short-change our ability to harness the full potential of our human capital. Thinking like a business owner can change the way we approach financial situations and make choices that will add value. Are you up for the challenge?

Protect yourself from disaster

Throughout life’s stages, there are several risks that can impact the value of your human capital. During each of these stages, different risks may be more prevalent. Premature death, disability, and malpractice/liability risks can all be reduced by implementing an effective risk management plan.

Start by identifying the risk you are trying to protect against. Is the risk a temporary one or permanent? Next, what strategy is best used to manage the risk: risk avoidance, risk reduction, risk retention, or risk transfer. Avoiding or reducing an activity could help eliminate some risk. Though, in most cases you will be required to decide how much risk to retain (self-insurance) and how much to transfer to another party (by purchasing insurance).

Review your coverage regularly and adjust your risk management strategies as needed. Life events such as: marriage, purchasing a home, starting a family, and starting a new job, can serve as helpful reminders to reassess the risks before they can derail your financial foundation.

Leverage your resources and plan for tomorrow

They say Rome was not built in a day; building your wealth is no different. Business owners understand the difference between cost and value. There is only so much time in a day, and one cannot be an expert in everything. Leverage your time by hiring professionals. A certified financial planner is trained and experienced to help guide you through life’s financial events.

Follow common-sense investment principles

Most financial institutions will require you to complete a risk tolerance questionnaire, which is designed to help discover your comfort with various situations and outcomes. This should be used to help facilitate a discussion around risk and return, not confine you to one specific investment solution. In theory, the more risk an investor takes, the more potential for return.

Understanding the full extent of investment risk is often more complex. Instead, we rely on guiding principles to help us make sense of and gain comfort with accepting the risk of uncertainty. Principles such as diversification, dollar-cost averaging, being disciplined (goal focused), and compounding (your investment returns being reinvested to earn additional returns), can all be used to your advantage.

Make your money work for you

Today, with yields on bonds and other low risk investments at historic lows, it can prompt an investor to ask, “How should I be invested”? Consider including the value of your human capital in your overall portfolio of wealth.  It can dramatically change how we think of our asset allocation once we have added your human capital to the picture.

Studies have shown that for most occupations, human capital tends to be more bond-like (assuming it exhibits slow, stable growth and is not as volatile as the stock market). Let’s apply this to our example from Part I with the 35-year-old physician whose human capital is valued at $5,000,000 and has $300,000 available for investment in a balanced portfolio (60% equities and 40% fixed income):

Balanced Portfolio$ Value%Balanced Portfolio, including Human Capital$%
Equities$180,00060%Equities$180,0003.4%
Fixed Income$120,00040%Fixed Income + Human Capital$5,120,00096.6%
Total$300,000100%Total$5,300,000100%

While this may seem like an extreme example; it helps illustrate a point. Sometimes we only focus on tangibles we can see, like a fluctuating investment statement balance. In my opinion, excluding intangibles like human capital when designing your investment portfolio can have a significant impact on your investment decisions for your financial assets and what you are able to accumulate through your working career. No one wants to lose money investing, but what about lost opportunities to grow your wealth?

The decisions you make now are cumulative and can influence your finances throughout your working career and into retirement. Everyone has a different ability and willingness to accept risk, lifestyle expectations, and savings capacity. Speak to a financial planner and build a personalized financial plan that works for you and your human capital.

Notice to Readers: Unless otherwise noted herein, the sources of all performance data is Bloomberg and Cardinal research. This article has been prepared for general informational purposes only, without reference to the investment objectives, financial profile, or risk tolerance of any specific person or entity who may receive it. Investors should seek professional financial advice regarding the appropriateness of investing in any investment strategy or security and no financial decisions should be made on the basis of the information provided in this newsletter.

About Jeffrey Ryall

Jeffrey Ryall, CFA, CFP®, is an Associate Portfolio Manager at Cardinal Capital Management, Inc. Jeffrey specializes in developing personalized financial plans and customized investment portfolios for professionals and incorporated business owners, with complex financial needs. If you have a financial planning question, connect with Jeffrey at [email protected] or through LinkedIn.

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