Think of your financial wealth and
human capital as the portfolios that you need to balance
against. Your human capital portfolio is much like a bond
portfolio. Just as you work and get a regular paycheck,
a bond provides a regular stream of income. To balance
this conservative portfolio, an investor with a great deal
of human capital would invest his money more aggressively.
Financial wealth, on the other hand, is subject to market
volatility and is therefore more risky than human capital.
An investor with a great deal of financial wealth in comparison
to human capital would want to balance out that financial
wealth with conservative investments.
Typically as we age, financial wealth rises while human
capital falls. Your amount of human capital is larger when
you're young in proportion to your financial wealth, because
you have a long time horizon to work and you haven't had
the time to accumulate a great deal of financial wealth.
Over time, however, we accumulate more assets but our earnings
horizon declines. As our proportions of financial wealth
to human capital change, so should our asset allocation.
Greater financial wealth relative to human capital should
result in a greater amount of investments dedicated to
a conservative asset allocation versus an aggressive asset
allocation.
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates
Professor
Roger Ibbotson, Yale University, chairman and founder
of Ibbotson Associates 
