How to do AA based on Age, Risk, HUMAN Capital ?

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grtwallchina75
Posts: 1116
Joined: Thu Mar 15, 2012 11:04 am

How to do AA based on Age, Risk, HUMAN Capital ?

Post by grtwallchina75 »

Folks,

How do you figure our AA for Long Term goals considering your Human Capital/Jobs ? (eg " Income Loss/Gain b/c of Potential Loss/Gain of Job or Reduced Pay b/c of Technology )

Per this article - https://www.kitces.com/blog/category/10-human-capital/

"Which means workers in conservative “bond-like” jobs might have even more equity-heavy portfolios, while those in more aggressive “stock-like” jobs should invest even more conservatively!"

Vanguard's AA Q - https://personal.vanguard.com/us/FundsInvQuestionnaire which Taylor suggested to us doesnt consider Risk of Human Capital Loss / Gain (eg: I may loose my 150K Job and may only get a 85K job after 0-3 yrs and how does that impact my Retire Goals?)

Right now, my wife and I are 40 and AA of 80:20 - here is the thread with all our Asking Portfolio Question details - viewtopic.php?f=1&t=215483

Given High risk of Potentail Human Capital/Income-Flow loss, Should we reduce our combined AA to 70:30 ?

I used few software for Senario Analysis with MC Stress tests - eg eMoney etc yet I cant model this well and figure this out. Any suggession or wisdom will be much helpful!
gouverneur
Posts: 101
Joined: Sat Apr 23, 2016 10:25 am

Re: How to do AA based on Age, Risk, HUMAN Capital ?

Post by gouverneur »

Risk tolerance is too personal to model well. After all, if you wanted to account for risk for various asset classes, you can work from historical returns. What does it mean to have an "equity-like" job--is that a 10% of being laid off in the next year (which seems like a high risk)? It's also tricky because more of it is within your control, i.e., how you perform in the next year at work is within your control, whereas how the market performs in the next year is beyond your control.

Perhaps the answer to having a riskier job is not to alter asset allocation (which in theory should be applied to the part of your money you won't need to touch for a long time, until retirement) but to increase your emergency fund or cash reserves. The standard advice is keep 6 months' expenses in cash, but people with bond-like jobs probably don't need more than 3 months' reserves, whereas people in sales or high-turnover jobs might need a year.
Topic Author
grtwallchina75
Posts: 1116
Joined: Thu Mar 15, 2012 11:04 am

Re: How to do AA based on Age, Risk, HUMAN Capital ?

Post by grtwallchina75 »

Thank you!

Given we have 4 sources of income, my primary job (1), my 2nd-temp job (2), wife's job (3), and CA UI (4) (if primary defaults) and 12 months of EFund in Liquid, do you think we should not factor into Human Capital in our RetireGoal AA ?

Changes of loss of 1+2+3 is slim b/c 1, 3 are in different industries (diversified sector) and 2+3+4 (ie loss of 1, my primay job) will meet our monthly expense and no RMD needs in EFunds

Efund RMDs are needed if loss of 1+2 or 1+3 happens.

thanks for your input!
gouverneur wrote: Perhaps the answer to having a riskier job is not to alter asset allocation (which in theory should be applied to the part of your money you won't need to touch for a long time, until retirement) but to increase your emergency fund or cash reserves. The standard advice is keep 6 months' expenses in cash, but people with bond-like jobs probably don't need more than 3 months' reserves, whereas people in sales or high-turnover jobs might need a year.
MrMatt2532
Posts: 454
Joined: Sun Mar 15, 2009 11:58 am

Re: How to do AA based on Age, Risk, HUMAN Capital ?

Post by MrMatt2532 »

Take a look at a post I made years ago: viewtopic.php?t=109504

It didn't get much attention but I think it directly answers your question. Specifically look at the discount rate to capture bond like vs stock like jobs.

I actually have a simplified approach I use today that is more practical to use but still considers the discussed items. I can get into that if interested...

Matt
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