Human Capital as Age-Dependent Asset Mix

The largest component of household wealth consists of nontraded human capital. For a nation as a whole, returns to human capital (i.e., labor's share) is about 60% in national income. Although this is only a rough benchmark of the share of human capital in total wealth, labor income should play a central role in structuring household financial decisions. Human capital should be viewed as the core wealth, and households' financial wealth should be structured as a supplementary portfolio to make up the most desirable form of the total wealth portfolio. Investments in financial assets should act as a powerful tool for hedging the risk associated with nontraded human capital. A key in understanding life-cycle pattern of household finance is the age-dependence of human capital. Although this observation is not new, past researches in this area paid relatively small attention on the risk characteristics of human capital. Economic inquiries into agents' consumption and portfolio decisions originates in Samuelson (1969) and Merton (1969).