Connecting Your Career with Your Financial Capital
Part 4: Quantifying the Worth of Your Wealth
Welcome back to our multipart series on how to balance your human and financial capital risks and rewards. In today’s final installment, we’ll connect your personal goals and values with the investment strategies we covered in our last post - Balance Your Career Risk with Investments for Success
At the end of the day, it’s not as much about the money as it is about what your wealth is worth to you. In financial terms, what your money is worth to you is referred to as your marginal utility of your wealth – i.e., not whether additional wealth might be achieved, but whether it needs to be.
Would additional wealth impact the quality of your life in a meaningful way? In investing, that means measuring your risk-taking against what you need to achieve your greatest life’s goals and what is sensible for offsetting any increased risks you’re taking in your career. Beyond that measure, additional investment risks may pay off, but at what cost, if the risks are realized instead?
In other words, we believe you should review your options if you’ve “won the game.” You might have already acquired enough assets in a well-crafted portfolio from a lifetime of disciplined savings, or from monetizing your business through a sale.
If so, consider how good you have it. You have accumulated enough wealth to provide you and those you care most about a lifetime of spendable income, which should grow along with inflation. You know this because your wealth manager has created a sensible and data-driven personal financial and investment plan, incorporating a spend-down plan to meet your needs. Now why would you want or need to take further risk in your personal portfolio if your needs are already fully met?
If the portfolio doubled quickly but at high risk, would you also double your lifestyle spending, with twice the enjoyment thereof? Probably not. But what if the other tail showed its ugly side and your portfolio plummeted to half or less of what you had originally amassed right before you started to live beyond work? You’d now only be able to provide a fraction of the original lifetime of spending you’d planned for, with less confidence in how long it would last or how much you’d be able to pass on as your legacy.
Would you be willing to make that trade?
Mind Your Behavioral Manners
So far, we’ve been focusing on the practical side of financial planning. If you are an entrepreneur or in a similar high-profile profession, you probably are already well aware that there’s also a human element involved in dynamic planning. For wealth management, that’s where behavioral finance factors in. Behavioral finance provides us with many helpful insights on why professionals who are highly successful with their human capital often end up falling short when managing their financial capital.
Odds are, if you’re busy with your action-packed career, you face more investment choices than you can sort through, organize or even fully absorb. Much of the wealth you’ve accumulated may have come to you in the form of bonuses, matching funds, partnership distributions, higher ownership equity value or other sources that may be dangerously easy to think of as “found money.”
It’s also easy to assume that, if you’ve done well so far, the ride ahead should remain swift and smooth. “Easy come, easy go,” you may convince yourself. That is, until your so-called found money is lost, and you realize that “go” wasn’t so easy after all. There’s a wise adage that the surest way to create a small fortune is to start with a large one and then make “interesting” investments.
In addition, as an entrepreneurial professional, you’ve probably succeeded by concentrating your human and professional capital together into a unified push to advance your stellar career. If you’ve done well with that, you may become overconfident, as this study suggests, and start to assume you’ll be successful at everything you undertake – even your personal investing, which often calls for different skills and strategies. You may overestimate your ability to “read” the market, extrapolate past success into future certainty, and end up trading too often and in opposition to your best, long-term interests.
Here’s one more: Common biases such as greed and herd mentality may cause you to lose sight of your personal marginal utility of wealth, tricking you into stretching for extra returns by (wittingly or not) taking on extra market risks, even once you’ve exceeded your need to do so.
Other behavioral biases come into play as well, and can work against your successful investing experience. We could write another separate paper on the subject. But don’t just take our word on it. The authors of the study “Human Capital and Behavioral Biases: Why Investors Don't Diversify Enough” offered several other behavioral explanations for why successful professionals often fail to diversify.
The Challenge, and a Call To Action
Circling back to the beginning of our series, when is the last time an advisor, broker or similar financial pro asked you whether you’d taken your human capital risks into account – before placing some trade you or they had in mind? For that matter, did anyone address the subject when you were building your portfolio to begin with?
If your answers are yes, we believe you can consider yourself among a fortunate few. Based on the research we’ve cited here as well as our own observations, we suspect most individuals and professionals alike aren’t even aware of the important role your human capital should play within your overall wealth management – never mind having a solid strategy and effective solutions to effectively integrate it into your ideal plans.
We suggest a reasonable path is the best way forward, applying shrewd financial thinking, investment principles and human capital considerations to your wealth and long-term goals. In contrast, people and their advisors alike usually overlook the risks and circumstances related to their human capital, rather than integrating them into their investment reviews and portfolio management actions.
At any age, a Cogent Conversation® and analysis of your particular circumstances is warranted – even necessary – as is understanding how to leverage your human capital asset toward enjoying the best investment life you possible can. This is why we’ve made it one of our missions to educate the public and financial professionals alike about human capital risks and its effects on people’s wealth.
Contact us today if you would like to explore advanced strategies for managing, protecting and potentially converting your concentrated and/or illiquid positions or risk profile into safer, more diversified holdings for your family wealth.
In case you missed the first three parts of this series on Connecting Your Career with Your Financial Capital you can start here: