Interest rate differentials between the US and Australia are set to narrow further, creating Foreign Exchange opportunities for investors
Individuals should consider the value of their human capital as well their financial assets when calculating their net worth.
A recent presentation by Canadian Professor Moshe Milevsky at the Portfolio Construction Forum supports this idea. Valuing human capital involves calculating the present value of a person’s future after-tax salary. This calculation includes their current salary, plus assumptions about salary growth and years remaining in the workforce. The person’s asset allocation would then consider the degree to which a person’s human capital value resembles a bond or a stock (or a blend) and how much the human capital value is impacted by economic cycles, interest rates and equity markets.
Professor Milevsky used his own career as an example, suggesting that since he works as a tenured professor at a government institution, with periodic inflation-based salary increases, his human capital value behaved more like a government inflation-linked bond. Therefore, his investment portfolio was100% invested in shares. During the global financial crisis, equities fell. So, he argued that the value of his human capital increased as Canadian interest rates fell, which lowered the discount rate applying to his future income, much like a bond price. By contrast, an investment banking analyst working in financial markets should be entirely invested in government bonds, given that the analyst’s human capital value is heavily tied to equity markets.
He also noted that individuals often hold a higher-than-index weighting in the shares of the company or industry they work in – because they invest in what they know. This results in their personal balance sheets (their human capital and their investment portfolio) being heavily exposed to a single company or industry. There are numerous examples of companies that become financially distressed, where people lose their jobs and the shares in the company they worked for becoming worthless.
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