Goh Eng Yeow, Senior Correspondent

Is your job more a stock or bond?

It's about using human capital to build financial wealth

At a recent reunion with some former colleagues, I was pleasantly surprised to find the different ways in which their lives were panning out, depending on the type of jobs they had taken up after leaving the newsroom.

One of them had joined a multinational oil company as an executive. Even though she was there for barely six months, her manager was already busily charting her career path for the next five years. "For a company with over 100 years' history, taking a 30-year view on an employee is the norm," she told us in a matter-of-fact manner.

There are many jobs such as hers in stable industries and in professions like medicine or law which produce a consistent employment income. To an investor, this would resemble buying into a long-term government bond and enjoying a regular return on that investment.

I also have friends who have joined companies where the employment prospects are far less certain, and where a high-flying career can suddenly be derailed by a change of bosses.

The sudden swings in their fortunes remind me of the more adventurous investors who pile into the stocks of young, high-growth companies only to find they could not stomach the ride as the stock market goes on a roller-coaster.

But I find it useful to use stock market analogy to describe the risks and rewards which a person may be getting from his job. That is because, depending on the type of job which a person holds, this should, in turn, have a bearing on the type of investment strategy which he should adopt.

For instance, those with a "stock-like" career might want to own more bonds if only to get a source of stable passive income to offset the risks they may be encountering in their jobs. Similarly, those with bond-like careers can afford to take more risks like having an investment portfolio which has more stocks.

In the financial sector, there is an entire area of research known as life-cycle finance which is devoted to examining how much of a nest egg a person should put into riskier assets such as stocks, depending on which stage his career is at.

In a paper on the subject many years ago, US researcher Zvi Bodie noted that in the early years of a person's career, the bulk of his wealth is often dominated by "human capital", or the wealth which he gets out of his work. As such, he should try to invest more in the stock market in order to maximise his financial wealth.

But as age catches up, the value of human capital would usually decline as a proportion of an individual's wealth. When he reaches the end of his working career, he will have to rely on the financial wealth which he has accumulated to sustain his lifestyle as he retires, unless he creates fresh human capital by taking up a part-time job.

"However, the opposite result is also possible. For people with risky human capital, such as entrepreneurs, it may be optimal to start out early in life with no stock market exposure in one's investment portfolio and to increase that exposure as one ages," Mr Bodie wrote.

Given the uncertainties of the job environment, a person's human capital may ebb and flow - sometimes in a dramatic fashion - as he encounters major changes good and bad in his career such as getting a big promotion or getting demoted or even fired.

As such, trying to estimate a person's human capital value is sometimes akin to pricing a stock, given the many variables which may affect his career.

And in making the efforts to mitigate the risks from the uncertainties which he may face in his job, he should adopt another practice in the financial market - that of diversifying his personal wealth balance sheet to ensure there is enough set aside to tide him over any unexpected crisis.

However, what is interesting to note is that those who have higher level of risk tolerance also tend to choose more "stock-like" careers and adopt riskier investment strategies, while people with "bond-like" jobs are also more conservative in their investments.

So one question which an individual should ask himself as he assesses his investment strategy is how aggressive he is, career-wise. Surely, if he is an entrepreneur, he should be holding more cash and investments offering passive income such as bonds to offset the risks he may be taking in his business.

Not that people with bond-like careers are unable to prosper. During an economic slowdown, a rock-solid career with a steady stream of income may turn out to be a person's best asset as he gets the pick of choice assets which other people will find themselves too cash-strapped to buy.

I have an old banker friend who was able to snap up a landed property in a mortgagee sale during the 1985 economic recession because his stable job enabled him to get a bank loan at a time when less creditworthy borrowers were being turned away.

Many years later, he tore down the house, building on the site a bungalow which he still occupies, and a pair of semi-detached houses that give him rental income. The properties are now worth millions of dollars. He is an excellent example of how to use human capital to build financial wealth.

engyeow@sph.com.sg