Question

There is always a catch. When it comes to investing the catch is risk. In an earlier week we talked about borrowing money as a leap of faith. The lender expects you to repay the loan - but they can't know for sure. They can "secure" their loan against what you borrowed for - the car or the house. For the lender, there is the risk though that they don't get the full value back. If you invest in shares - you are the last one to get paid. Everybody else gets paid before the shareholder. So they take a big leap of faith! So debt (bonds, fixed interest securities) is lower risk than shares - but lower returns as well. That's the catch. If you expect high returns you are going to have to stomach higher risk - the roller coaster of returns is steeper. So how much risk can you tolerate? The text emphasizes that when you are investing you need to consider the risk of your human capital. How risky do you consider your human capital? Is you human capital higher/lower than the average? Why ?

Answer 1

I consider my human capital to be risky but the risk element is not very high. My human capital risk is lower than the average. This is because the main risk associated with my human capital is death risk and disability risk. Besides these two there is the professional competency risk.

The reason why I consider my human capital risk to be lower than average is that I have well protected and amply protected my human capital with life insurance policies as well as disability insurance policies. So even in case of a career-halting illness or an untimely death the human capital shortfall will amply be filled by the insurance pay-out. I have also done asset allocation in my portfolio in such a manner that when required the portfolio can be liquidated. I have also considered and factored in professional competency risk and being an accounting professional I constantly upgrade my skill sets with the latest development in my profession. In terms of tangible value I consider my human capital to be neither higher nor lower than the average. I am an accounting professional and hence my level of human capital is at par with other accounting professionals who have the same skill sets, same educational qualifications and same type of work experience as me.