08 July 2026
When building an investment portfolio, advisors typically focus on financial assets: equities, bonds, cash and alternative investments. A recent article from the CFA Institute’s Enterprising Investor suggests that this approach overlooks what is often a client’s most valuable asset - their future earning potential, or “human capital.”
The article revisits the principles of lifecycle finance, a theory pioneered by Robert C. Merton, which holds that portfolio allocation should be based not simply on an investor’s age or current wealth, but on the relationship between financial capital and human capital. Future labour income represents an economic asset whose characteristics - its stability, volatility and correlation with financial markets - should influence investment decisions.
The analysis draws on recent research by James Choi and co-authors, who propose a practical framework for incorporating human capital into portfolio construction. Rather than relying on complex academic models, their approach estimates the present value and risk profile of future earnings using familiar variables such as age, expected income, wealth and labour-income volatility. The result is a practical method for determining an equity allocation that better reflects a client’s overall economic balance sheet.
The implications are significant. Two investors of the same age with identical portfolio values may require very different investment strategies if their future earnings differ substantially. A tenured professor or government employee, whose income is relatively stable and bond-like, may be able to assume greater equity exposure. By contrast, an entrepreneur or commission-based professional, whose income fluctuates with economic conditions, may already have considerable implicit exposure to equity risk through their business or career.
The article also challenges conventional age-based allocation models. According to the research, permanent earning power - rather than temporary changes in annual income - is the key variable. Short-term fluctuations should have little effect on long-term asset allocation, whereas lasting changes in career prospects or income stability may justify a more meaningful adjustment.
Perhaps the most striking conclusion concerns equity exposure during the accumulation phase. The model suggests that many working-age investors may actually be underinvested in equities, because their largest asset - future labour income - already behaves like a relatively stable fixed-income instrument. For these investors, insufficient equity exposure may represent a greater long-term risk than excessive exposure. However, this conclusion depends critically on the characteristics of their future income and should not be applied uniformly.
At the same time, the article emphasizes that quantitative models cannot replace professional judgment. Human behaviour remains a critical factor in portfolio construction. Clients often overestimate their tolerance for risk during rising markets and underestimate it during periods of market stress. Behavioural biases, sequence-of-returns risk and individual financial objectives all require careful consideration beyond what any formula can capture.
For investment professionals, the message is clear: understanding a client’s balance sheet means looking beyond the assets already accumulated to include the value and nature of future earnings. Asking whether that income resembles a bond, an equity investment or a concentrated business exposure can fundamentally change the way portfolios are constructed.
For members of CFA Society Italy, the article offers a timely reminder that effective financial advice is built on a comprehensive understanding of each client’s circumstances. Incorporating human capital into portfolio decisions can help move the conversation beyond standard risk questionnaires and age-based rules, enabling more personalized and economically grounded investment strategies.