How Education Affects Wealth

Human capital, the ability to earn income, is the major resource for most households.  Earning ability reflects an individual’s skills, personality, education and health.  Higher education has a significant effect on income.  However, employment income is subject to uncertainty, the risk of losing one’s job.  Education also has an influence on the probability of unemployment .  Working over a life time of forty years generates millions of dollars of wealth:

The uncertainty associated with future earnings creates risk for the individual.  This risk varies through the individual’s life time.  The young face a high level of uncertainty, as career choices, training and education may be ongoing, and job opportunities entering the workforce are unclear. Even having found employment, the young may be the first to be made redundant if employee reductions are necessary.  Employment risk will also be affected by the type of industry an individual works in.  Some industries are more risky, due to the economic cyclical or the reliance on variable demand, while other industries are relatively stable.  Job functions also affect risk, with some positions more likely to be cut back.  Employment risk can be a very individual issue.  Most individuals know if their employment position is relatively secure, or if the ‘writing in on the wall’ about potential redundancies.

Given the importance of the employment income, individuals need to adjust their investment risk to offset employment risk.  When employment is secure, greater investment risk is warranted.  However, as the probability of unemployment increases, investment risk should be reduced.  The financial advisor, by adapting the investment portfolio risk to employment risk, can provide useful security to clients, and engender greater client loyalty.