If I were a rich man…

We tend to assume that wealth is accumulated over time, often growing fastest in the later working years. Yet, in a broader sense, we are all born with wealth in the form of human capital, which represents the value of the earning potential that we have over our working lifetime.  As younger people have a long time to go before they will need the money, the advice they receive is often that excess earnings should be invested predominantly in equities.  A subtler approach takes into account the attributes of each person’s human capital which ranges from bond-like to equity-like in nature.  How assets are invested should, ideally, take this into account.  Cash-flow modelling can help those in the accumulation phase of investing to understand the financial impact of changes to their human capital.  Owning sufficient life cover to protect the outstanding human capital should be an important part of the discussion.

 

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