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Plan Well, Retire Well

Saving and investing your money

Human Capital and Your Financial Capital: The Diversification Factor

This is Paul McNamara writing and I am an Associate Professor in the Department of Agricultural and Consumer Economics at the University of Illinois at Urbana-Champaign as well as an Extension Specialist (Consumer Economics) with University of Illinois Extension. Outside of the University and Extension, I am married and my wife and I have six children. I have practical experience in budgeting and managing money in the context of a large family!


On Monday of this week our Department hosted a seminar speaker, Ms. Doriana Ruffino (PhD candidate in Economics at Boston University), who spoke on the effects of labor mobility on portfolio allocation. She presented a theoretical model calibrated to U.S. financial data that gives an explanation for the puzzle of the high share of own company stock that many workers include in their portfolios. Her explanation rests in the option that workers have to move to another job within a different company or with a different industry, if things with their company weaken. This explanation also would imply a distinct age-related pattern of holding company stock and this can be tested empirically with data on asset allocation patterns of investors.


Whatever the specific conclusions we can draw about the impact of job mobility on portfolio allocation, research such as Ruffino's highlights the strong connection between a person's human capital and his or her financial wealth and security. This is a well-known connection, but we don't often highlight it in our financial education efforts. Some practical steps to act on might include:


* putting some attention into one's physical fitness and diet patterns to help maintain a healthy weight and minimize the chance of health-care related disability; or,

* developing or sharpening a job-related skill that would increase one's value to his or her company or organization; or,

* taking concrete moves to finish a college degree or advanced degree that would add to one's human capital and employment value.


For most of us, the links between our human capital (especially our health and education) and our financial security are very direct. The research shows that maintaining one's human capital is a good investment strategy!

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