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What type of asset is your life?

india Updated: Jul 03, 2011 21:39 IST
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It's a simple idea. In any calculation about how much risk your personal investment portfolio can bear, you should not only be considering what type of asset you have invested in, but also what type of asset your own life is. That sounds like a strange thing to say, doesn't it? Actually, it's a very useful thing to be aware of. It's not a completely new idea either, I've read about a number of times over the years in investment magazines and websites.

Your career has a risk-vs-returns level the way each type of asset has. You could be leading an equity life-high risk and hopefully high return or you could be leading a fixed income life (I wouldn't use the terms bond life or debt life because each could be misintrepreted)-low risk, high predictability but growth only within bounds.

The future is always uncertain but there are plenty of jobs and professions which have minimal internal risk. The archetypal example is of course that of government servants but there are others. For example, a doctor or an accountant with an established practice has an income stream which has a high degree of certainty. Such a person can actually afford to invest much more in riskier asset classes like equity.

In comparison, there are much riskier professions. Whenever the newspapers have stories about people being laid off on a large scale, they seem to come from the same set of industries that vary between breakneck growth and slumps. More than lay-offs, there are jobs in any industry which have lower predictability - you'll surely know whether yours is one. And if you do have one of these 'equity' style jobs then your investment profile must be more conservative than otherwise. You should have a larger quantum of cash in the bank and probably have a few years' worth of income in safer investments.

An 'equity' profession has to be compensated by fixed-income investments, and vice-versa.