The Last Word On Nothing

Disclaimer: If you come here for the science, you can skip this post. I feel like writing about resource allocation today.

If you ever visit a financial planner or investment advisor, they will likely ask about your job. That’s because much of your wealth, especially if you are young, is invisible. It’s in your ‘human capital’—separate from the financial capital you can see in your accounts—and it’s calculated as the present value of your future earnings.

On every payday throughout your career, you exchange a little human capital for financial capital, running out your stores until you stop working.

Let’s say you have a unionized government job and no intention of leaving. The ghostly presence of your future salary is an asset that’s more like a treasury bond than a stock. It’s low risk and steadily pays out until the bond’s maturity [your retirement].

What fascinates me is what you’re supposed to do with this information. The technique is called a ‘completion portfolio’, and I’m finding the concept extends to all the resources over which you have command, whether you are scraping by week-to-week in the gig economy or sitting like Smaug in a treasure-filled mountain. In some ways, the completion portfolio is a blueprint for life.

As in the previous example, if you know that your wages are bond-like, the game plan is to take whatever savings you can muster and load up with higher-risk, higher-return equities (like stocks) when you are young. Financial advisors will tell you it’s because you can take on more risk when you are young. That’s true, but the main idea is to avoid having a portfolio that is unbalanced, dominated by the bond-like human capital within you.

And if you are destined for the life of a serial entrepreneur, then your highly uncertain human capital is equity-like and you’d better blend some bonds into your tangible accounts. Later on in life, when your savings are bigger than the amount you expect to earn in the future, there’s less human capital to compensate for, so your portfolio should carry closer to the overall risk balance you’re targeting.

The financial portfolio that molds to the nature of your earning potential is the completion portfolio. It acknowledges that money doesn’t exist in a vacuum. That money has a context, and it is there to support a living, unique human who is leading a particular sort of life in the real world, a life that contains vast stores of other types of value. Maybe it’s there for the benefit of a whole family and a few of the charities they care about. Or it’s money from an indigenous land claim settlement, and it needs to be invested to support the development of the community for generations to come.

It has become my view that all portfolios should be approached as completion portfolios, never taking center stage, always tailored to the strengths and weaknesses and aspirations of the humans who steward it. Not just to their ‘human capital’ in the earnings sense, but to their human potential in general: their social contributions, their artistic vision, even the wellbeing of the cats and dogs with whom they share delight and comfort.

When investors talk about a ‘completion portfolio’, they’re just talking about money. But really it should apply to every type of resource at our command. Zoom out even further and we see that everyone is an investor: Resource allocation is a central question in life. How you allot your attention, your skills, your time and all your other resources determines most of the effect you have on the world. Ideally, all of your resources are configured as a completion portfolio for the human potential of you and your family and everyone you care about.

If your children fail to thrive because you’ve become a workaholic making all kinds of money, then you’ve failed as an investor. You have a concentrated position in those kids and their future growth. Their human potential is more valuable than all the money in the world, and we’d best not forget that for a second.

Any other investment philosophy would be incomplete.