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Maximize the Right Capital

The U.S. stock market has been jumpy lately. ‘Tis the season for spooks, I suppose.

Spooked is a good way to describe a young man who came to me for advice about the stock market the other day. Recounting the recent performance of U.S. stocks, he wanted to know how to handle his investment portfolio.

The young man, probably 27 or 28, remarked that he “really needed to spend more time thinking about his investments.” Naturally, he presumed, thinking about his investments was a productive use of time. After all, he had a goal of retiring early, so anything he could do to protect his retirement savings from a potential market downturn, he figured, was time well spent.

I understood his perspective. But my advice to the young man was the exact opposite: Don’t spend even a minute contemplating your portfolio.

A skeptic may think, “Of course you told him that. It takes you off the hot seat.” I get it. That mindset, however, misses the real point.

The fact is for the young man – and for many – investment performance is important but not supreme. Here’s why.

Rather than spending time thinking about his investment portfolio, the young man could choose to read a trade journal about his profession. Or watch a YouTube video on how to become better at his job. Or think about a way to streamline a process at work that consumes too much time and money. In other words, he could choose to spend time educating himself, figuring out how to become a more valuable employee or business person.

What could that do for him? Perhaps it earns him a raise. Perhaps it allows him to interview for a new position with higher pay. Perhaps it allows him to expand his company and make more money than he ever thought possible.

For individuals in the early stages of their careers, spending time maximizing investment capital is a poor use of time. Why? Because there is significantly more upside in maximizing a different kind of capital – human capital. Human capital is an individual’s unique blend of talents and skills. Those talents and skills have a strong tendency of governing how much we make in our lifetimes.

Think of it this way. Let’s say a 28-year-old with a $20,000 investment account pours himself into researching stocks. Through his efforts he earns 12% per year for five years – a solid return by any standard. The young man would have generated a gain of about $15,000 over the timeframe.

Now, instead of spending time researching investments, let’s say the young man, earning $45,000 a year at his job, pours himself into his work for five years. Due to his dedication and the value he creates for the company, his boss rewards him with above-average pay increases and a promotion. His $45,000 salary could realistically eclipse $65,000 by the end of the five years. In other words, his efforts would have yielded him a “return” of $20,000 – a third more than what he earned through his investing efforts.

Whether it is a raise or a promotion, a side job or a new job, focusing on human capital creates opportunities.

When we are young we often have little investment capital but an abundance of pent-up human capital. If we unleash our potential to maximize our human capital, it logically leads to accumulating larger amounts of investment capital over time.

If you are more than 10 years away from retirement, here’s my advice. Think about your portfolio just long enough to devise a sensible lineup of investments, save as much as you can, and spend your time figuring out how to make yourself more valuable in your profession.

Odds are it will be time better spent.

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