Financial advisors and asset managers focus solely on the investor’s time to retirement and risk tolerance when determining investment portfolio allocations and ignore or assume away personalized factors that may be important to a proper allocation.
Instrument Capital is a company focused on a more complete picture of an investor’s portfolio by including factors such as job profile, house value, geographic location, and demographic profile into portfolio optimization. In this paper, we focus on the benefits of hedging an investor’s employment income versus a standard optimization that does not consider an investor’s employment income.
We show by algorithmic simulation that for an investor that faces unemployment risk, accumulated wealth outcomes are materially improved by hedging employment income. For an investor that starts his career at 25 with a $50,000 salary and faces a chance of losing his job in any given year, we show that hedging employment income achieves a 43% improvement in accumulated wealth (amounting to $1.2mm by age 60) and closes 55% of the gap between the simulated scenario and the no job-loss ideal scenario.
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|Risks & Disclosures: The information contained herein is general in nature and based on authorities that are subject to change. Instrument Capital guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Instrument Capital assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. All trading involves risk. Only risk capital you are prepared to lose. This content is intended for educational purposes only, and shouldn’t be considered investment advice.|