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Human Capital

February 19, 2013
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Most of the concentration in the field of wealth management by nature tends to be on financial assets, however for majority of clients who are still working especially individuals who are not close to their retirement years the value of their human capital should be more important to them than the daily or even quarterly changes in their investment portfolios. After all an individual has a a higherlevel power over their human capital. This control can come from changing jobs, pursuing additional degrees or credentials, or increasing their work load by taking on more clients or patients. In comparison, you don’t have any power over what your assets will return annually be it those invested in financial markets or those in real estate.

So what is human capital? Technically speaking from a finance/economic perspective it the net present value of your total earnings from your profession. Basically summing up all your earnings and finding its present value using a reasonable discount rate. The earnings that will be generated based on your expertise and skill. For many people, this is a relatively fixed quantity that will probably grow on a long term basis based on a set rate, but in a changing global economy where individuals are frequently changing careers, delaying retirement or choosing post retirement careers, an exact human capital figure is more difficult to estimate. Moreover our lives which for many will include dealing with various adversities and/or usual curve balls life will throw its way, this estimation is not as easy as some software programs can make it out to be. Nonetheless, to put together a viable and holistic financial plan one does need to make some guesstimates of their lifetime earnings and take into consideration potential changes that could come about down the line.

Another reason for taking into consideration your human capital can be for assessing your overall risk tolerance. Individuals with careers that generate stable cash flows that are relatively secure as long as they are employed are probably more suited to take on more risk on other capitals they have invested be it in financial assets, real estate or business ventures. Whereas those employed in highly cyclical industries or those with a very unpredictable compensation scheme may want to take on less risk with their other capital.