How should the balance between human capital and financial capital influence asset allocation over an investor's lifecycle?

Human capital (the present value of future labor income) is the largest asset most people own early in life. Treating it as part of the total wealth portfolio fundamentally changes optimal asset allocation.

Total Wealth Framework:

Total Economic Wealth = Financial Capital + Human Capital

A 25-year-old engineer earning $95,000/year with 35 years of stable employment ahead might have:\n- Financial capital:$50,000 (savings)

• Human capital: ~$1,800,000 (PV of future earnings at a reasonable discount rate)\n- Total wealth:$1,850,000

Financial assets represent only 2.7% of total wealth. The 97.3% human capital component dominates the allocation decision.

The Bond-Like vs Equity-Like Distinction:

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Case Study: Two 30-Year-Olds

Margaux (government actuary, stable salary, pension):

• Human capital: $1,500,000 (very bond-like, low correlation with equities)\n- Financial capital:$80,000
• Optimal allocation: 85% equities / 15% bonds in financial portfolio
• Rationale: her total wealth is already 95% bond-like; she needs equity exposure in her financial portfolio to diversify

Felix (biotech startup CTO, equity comp, volatile income):

• Human capital: $1,200,000 (equity-like, high correlation with stock market)\n- Financial capital:$200,000
• Optimal allocation: 40% equities / 60% bonds in financial portfolio
• Rationale: his total wealth is already heavily equity-like through his human capital and stock options; adding more equity exposure concentrates risk

Lifecycle Shift:

As investors age, human capital depletes and financial capital (hopefully) grows:

Age	Human Capital %	Financial Capital %	Equity Allocation
25	95%	5%	80-90% (if bond-like HC)
40	70%	30%	65-75%
55	35%	65%	45-55%
70	5%	95%	30-40%

Key Refinements:

• Industry correlation: a Wall Street trader has human capital highly correlated with financial markets; they should reduce equity exposure further than someone in healthcare
• Flexibility: ability to adjust labor supply (work more hours, delay retirement) increases the effective value and bond-like character of human capital
• Mortality/disability risk: human capital is contingent on health; insurance converts this uncertain asset into something more bond-like

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