June 14, 2010
Are you a stock or a bond?
Posted by Usha Rodrigues

Having blogged about a certain risky personal investment, I thought I'd follow up with reassurance for those of you concerned about my financial welfare.  Worried about how much risk you're taking on?  Today's WSJ advises you to assess the market's affect on your human capital: your current paycheck and your career.

If you're an investment banker or a stock broker, you're already exposed to the market by virtue of your job.  You are, in effect, a stock. Even if you think the market is going to soar, best not to put all your eggs in one basket by investing heavily in stocks.   If, like me or the article's author, you're a tenured professor, your exposure to the market is close to zero, and you can afford to take on more risks.  Your human capital is more bond-like than stock-like.  So the prescription is: if you're a stock, invest in bonds.  If you're a bond, you can invest more in stocks.

The author simplifies a bit, of course: whether you work for a private school or a state school, your salary is indirectly tied to the market, via the performance of the endowment or your state's budget .  But the basic point is sound: you have to look at the stability of your income before you can assess your risk tolerance. 

It seems to me that a lot the Main Street outrage over Wall Stgreet bonuses occurred because many NYC/London investment professionals didn't follow the above advice.  They viewed six figure bonuses as a guaranteed part of their compensation, something they were owed.  And they didn't adjust their lifestyle and investments to hedge against a market downturn that would hit their paychecks and their portfolios.  

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