Investing is risky. Increasing your earning power is the best protection you have.

Whether you’re a confident investor, or you have a bunch of your money hiding out in cash, I think we can pretty much all agree that the stock market is unpredictable.

Historically it has always gone up…eventually, and so it’s reasonable for us to assume it’ll continue in that vein. But we can’t actually know that.

So, how do we protect against the possibility that the stock market will stop working the way it has in the past?

There are a variety of investment products you can buy that promise to hedge against losses in the stock market: managed futures, long-short funds, market neutral funds, gold, foreign currencies, cryptocurrencies. Most of which I understand fairly minimally. But I understand them well enough to know that the downsides of many of these investments are:

    1. It’s difficult to understand how they work,
    2. They’re expensive, and
    3. When the market’s going up, they do comparatively poorly.

Wouldn’t it be nice to have protection that can do well in up markets, can protect us in down markets, is straightforward…and hey, why not, gives us lots of income along the way?

Recognize what I’m describing? It’s your job.

Historically, the Stock Market Goes Up Over the Long Term. But Will That Continue?

If you look at a long-enough time frame, the stock market just doesn’t lose money.

This article shows returns from the S&P 500 (which, technically, isn’t “the market,” but it’s a good enough proxy for our purposes here) over rolling 1-, 3- 5-, 10-, 15-, and 20-year timeframes. Since 1973-ish,

    • The market has fallen in many single years.
    • It has fallen only once during a rolling 10-year-period.
    • It has never been negative over the course of 15 years.

And there have been many books and articles about this very phenomenon, including a particularly popular one entitled Stocks for the Long Run, by “perma-bull” Jeremy Siegel. Mr. Siegel has been known to say that investing in stocks is in fact safer than investing in bonds over the long run.

There are a couple of (big) problems with relying on that “stocks go up in the long run!” assertion:

    1. Even if it turns out to be right, and historical trends continue into the future, there can be a scary, rough ride between now and then. And it’s hard to hold on (stay invested) after we lose a bunch of money. Our scared animal brain, and not our rational brain that knows all the statistics, usually drives the train. And our scared animal brain will have us bailing on the stock market after we’ve lost a bunch of money, aka, At The Worst Possible Time.
    2. There’s no law saying the market has to perform in the future the way it has in the past.  

I’m not encouraging a bunker mentality when it comes to investing. When it comes to predicting tomorrow’s weather, today’s weather is pretty much the best guess we have. Similarly, our best guess about how the stock market will perform tomorrow is how it performed today.

So, I invest my own and my clients’ money heavily in the stock markets (both domestic and international) for long-term goals.

But it’s still a guess. Frankly, a hope that the stock markets will continue to work, more or less, as they have for the last century or so. And the world order changes pretty dramatically over the course of decades. Super powers change, entire economies change, old industries die, and new industries dominate.

How can we best prepare for the possibility that the investment markets might act in a way that we’re simply not prepared for?

We need to broaden our conception what our financial portfolio is, and invest in all pieces of this new, broader financial portfolio.

Broaden Your Total Financial Portfolio: Include Your Income

In the world of “traditional” investing, the kind of investing that involves stocks and bonds and mutual funds, perhaps the best way to improve your investment portfolio is to diversify your investments. Diversification has been called “the only free lunch” in investing.

Diversifying simply means owning many stocks instead of 1 or a few. Many bonds instead of 1 or a few. And for the sake of this article, I’m going to cheat a bit and say that diversifying also includes the idea of owning not just stocks, but also bonds and real estate. Technically, that’s the idea of “asset allocation” instead of “diversification,” but the underlying point is the same: own lots of different stuff, not small numbers of similar stuff.

Why would you want diversification? Because you want investments that zip, while other of your investments zag. That is, you want investments that have low, even negative “correlation”: they don’t move in the same direction, or at least not to the same extent, in response to the same market and economic events.

For example, if Amazon stock goes down (hey! It could happen! and, you know what? It will some day) and GE stock goes down just a little, then they have low correlation. And if the entire stock market goes down while the entire bond market goes up, then they have a negative correlation.

So far, so good?

It’s a great theory and empirically has been borne out. But it’s too narrow a window into our financial lives. If you’re retired, then, sure maybe your brokerage accounts and IRAs are 100% of your financial portfolio.  But if you’re still working, your finances also heavily affected by your income. Wouldn’t it be smart to invest in that  “asset,” too?

Thinking of Your Income as a Piece of Your Portfolio Shifts Your Mindset in a Helpful Way

If we think about your income as a financial asset in your total portfolio, just as we do your stocks and bonds, then we can take some useful lessons from that:

    1. Spend money to acquire (more and more of) that asset. Just as you have to spend money to buy a stock or a mutual fund, you should spend money (and time and effort) to improve your career, more specifically, your earning power.
    2. You actually have some control over your income. Not complete control, to be sure. But you can improve your earning ability in lots of ways: training, degrees, networking, negotiation, etc. How much control do you think you have over the stock market, or any one individual stock? Zilch.
    3. Your income is another source of diversification. Admittedly, your income is not completely separate from, not completely “uncorrelated” with, the stock market. After all, if you work at Amazon and you own a bunch of Amazon stock, then if the stock drops a bunch, probably some bad juju is going on with the company that might affect your job and income. (This is, of course, why I beat this drum regularly: do not own a bunch of stock in the same company that also gives you your paycheck.)

But your income can have low correlation with your traditional investments, and that benefits your total portfolio a lot. We can be less scared of the uncertainty of the stock market future if we focus on the financial benefit our career asset can provide.

A lot of personal-finance blog posts (mine included) attempt to convince you, or teach you, to do something differently. But here, I really just want to convince to think differently. That is, to think about your career, your job, your income, as a piece of your financial portfolio, just as stocks and bonds are. If you think about it that way, then I bet you might do things differently all on your own.

Are you treating your career as an integral part of your total financial portfolio? Reach out to me at meg@flowfp.com or schedule a free consultation.

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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.

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