Are you a Stock or Bond?
Evaluate yourself as having income like a stock or bond or somewhere mixed and then accordingly plan out your asset allocation on a personal level.
One way to view human life is to see it as a process of converting human capital into wealth, both financial and real. When you start out, the human capital is high while wealth is low. Midway (around 40 years), there should be assets which show the result of past 15-20 years of use of the human capital. At 65-70 years of age, the human capital is almost spent and now the wealth capital has to take care of rest of the life.
Now it is important to understand how the human capital is being converted into wealth. If it is in the way of:
  • A solid government job, without firing, then it should be considered as a solid bond with a decent coupon rate.
  • A big firm with good HR practices, then consider yourself to be a low-risk blue chip stock.
  • A freelancer with variable pay and/or performance linked pay, then consider yourself as a non-bluechip stock.
Place yourself in the risk-return continuum according to above 3 examples.
How you should allocate your assets depends upon what you are. So if you are a bond, then you should have an increased allocation to the equities. While if you are the freelancer group / non-bluechip stock, it would be better to have more allocation to the bonds in your wealth portfolio. The more like a stock you are in your income flows and job security, the lesser should be your allocation to equity. This is asset allocation at a totally different level and makes the investing decision much simpler for an individual.
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