Your whole wealth: total wealth from portfolio, home, human capital and car

In depth12 min read · 12 sources

Your portfolio is only one building block of your total wealth. For many people the largest asset is their future earning power, their human capital; then come their own home and their pension entitlements. If you look only at your portfolio, you often misjudge your risk: in the example below, 80% equities in the portfolio becomes an equity allocation of between 3% and 33% of total wealth, depending on the job. Here you draw up a household balance sheet, calculate the present value of your income and see what follows for your equity allocation and choice of investments.

The idea: a balance sheet for people

Companies set out their assets and liabilities in a balance sheet. The same is worthwhile for households, only with a wider view: the assets side includes not just bank accounts, portfolio, home and car, but also values that are not traded anywhere, namely the present value of future labor income and of the pension entitlements earned so far. The liabilities side shows the loans. This household balance sheet shows which risks you already bear before you buy your first share.

Official statistics show how household wealth is made up. In Germany, for example, the Bundesbank measures it in its Private Households and their Finances study. According to Deutsche Bundesbank (2025), German households had a median net wealth of €103,200 in 2023 and a mean of €324,800. 42% lived in their own home, 18% owned shares and 24% held fund units. Human capital does not appear in such statistics at all, even though for people in work it is easily the largest item, as the example below shows.

Human capital: the present value of your income

Human capital is today's value of all the labor income you still expect until retirement. You calculate it like the present value of a bond with rising coupons: each future net income discounted to today.

The discount rate is the real message. A secure income, for example in the public sector, is discounted at close to the yield on safe bonds; human capital is then large and bond-like. A volatile income with bonuses, commissions or profit sharing gets a higher discount rate; it is smaller and equity-like. For entrepreneurs, investment bankers or employees in cyclical industries, it often depends on the same business cycle as the stock market. The closest link is to your own employer: if it runs into a crisis, the share price and your income fall at the same time.

Human capital cannot be sold and can hardly be borrowed against, but it can be insured: term life or disability insurance protects the present value if income stops because of death or illness. Chen et al. (2006) and Ibbotson et al. (2007) therefore treat asset allocation and insurance needs as a single joint decision that starts from human capital.

Your own home: equity, leverage and true costs

An owner-occupied home appears on the balance sheet at its market value, with the loan on the liabilities side; the difference is your equity. The home is both an investment and consumption: its return is mainly the imputed rent, the rent you save. Three features make it special within total wealth:

• Concentration risk: a single property in one location is the opposite of diversification. Regional labor markets, interest rates and building regulations often hit both the home and your job at the same time.
• Leverage: with a loan, every percentage point of price change moves your equity by a multiple, as with leverage in a portfolio.
• Illiquidity: selling takes months and costs real estate agent commissions, closing costs and transfer taxes. In an emergency you cannot sell off a single room.

Whether buying is cheaper than renting depends on the running costs, not the monthly mortgage payment. Repaying the principal is not an expense but saving; the costs are interest, maintenance, property tax, HOA or building fees and the opportunity cost of the equity that would otherwise be working in your portfolio.

Car, pension entitlements, insurance and debt

• Car: a car is consumption, not an investment. It almost always loses value and has ongoing costs for insurance, registration and maintenance. Example: new price $30,000, worth $15,000 after five years, $3,000 of running costs a year; that comes to $30,000 in five years, or $500 a month. What belongs on the balance sheet is the current value, not the purchase price.
• Pension entitlements: Social Security, government and employer pensions and lifetime annuities are lifelong payments, usually adjusted regularly, and a large, bond-like building block of total wealth. The pension entitlement earned so far is shown in your benefit statements; you calculate its present value in the same way as human capital.
• Insurance: term life, disability and personal liability insurance are not investments, but they protect the large items on the balance sheet against total loss.
• Debt: a loan is a bond that you owe. If you hold $15,000 in a high-yield savings account at 2% while servicing an $8,000 car loan at 7%, you pay a net $400 a year for the convenience. Repaying is then a safe return equal to the loan rate.

Worked example: an employee's household balance sheet

A 35-year-old employee earns $45,000 net a year, expects income growth of 2% and will work for another 30 years. Her portfolio of $60,000 is 80% in an equity ETF ($48,000) and the rest in bonds. On top of that she has $15,000 in a savings account, a $400,000 condo with a $280,000 loan and a car with a current value of $20,000, on which $8,000 of the loan is still outstanding. Based on her pension statement, she expects a pension of $7,200 a year in today's purchasing power from the contributions paid so far, for 20 years starting in 33 years' time. All figures are example assumptions.

How much equity risk is embedded in human capital depends on the job. The following table varies only the discount rate and the equity-like share of human capital; both are assumptions for illustration, not measured values. The true equity allocation adds this share to the $48,000 in the portfolio:

With the same portfolio, the banker has a true equity allocation almost ten times as high as the civil servant. Under this assumption, her human capital contains $245,998 of equity risk, more than the employee has in her portfolio and human capital combined ($135,134).

What this means for your equity allocation and choice of investments

• Young and in secure employment: large, bond-like human capital argues for a high equity allocation in the portfolio. Over the years it shrinks, and financial wealth has to take on more of the safety role. That is the reasoning behind glide paths (see equity allocation by age).
• Equity-like income: the self-employed, entrepreneurs and employees with a large variable component already bear a lot of market risk. For them, theory argues for fewer equities in the portfolio and more liquidity.
• Not in your own employer: if you work at a bank, you should not overweight employer stock or bank shares; if you work in the car industry, avoid car stocks. If anything, do the opposite: favor sectors that have little to do with your own income.
• Not just in your own country: income and domestic equities depend on the same economy. That is an additional argument against home bias.
• Factor in property: if you already own a leveraged home, you hardly need additional residential property in your portfolio and should keep a reserve that can absorb repairs and changes in interest rates.
• Retirement: once your pension starts, your human capital is used up; your pension entitlements take over its role. How much the portfolio then has to carry is determined by the withdrawal rate and sequence risk.

For advanced readers: life-cycle models

In a simple life-cycle model, an investor holds a fixed share k of total wealth in equities, for example the Merton share. The portfolio then only has to add what is not already contained in human capital, and it cannot go below zero or above financial wealth F if borrowing is ruled out:

With k = 20% and the employee's figures, that would be 0.2 × 1,140,810 − 87,134 = $141,028, i.e. more than her entire financial wealth of $75,000. The limit applies, and the formula recommends 100% equities in the portfolio. This is consistent with models such as that of Cocco et al. (2005), in which labor income substitutes for safe assets and the equity share falls roughly over the life cycle. Bodie et al. (1992) add flexibility: if you can work more or longer after bad years on the stock market, you can afford to take more risk beforehand.

The subtleties lie in the correlation. Viceira (2001) shows that people in work whose income risk is independent of the market should hold more equities than retirees, but that a positive correlation between income and equity returns can push the share even below that of a retiree. Benzoni et al. (2007) let wages and dividends move together in the long run: the human capital of young people is then more equity-like and that of older people more bond-like, and the optimal equity allocation first rises and then falls. Over the life cycle, this produces a hump.

What the research shows

For owner-occupied homes, Flavin and Yamashita (2002) use data from 1989 to show how strongly the home shapes the rest of the portfolio: for 18- to 30-year-olds, the value of the house was on average 3.5 times net worth, for those over 70 only 0.65 times. With a relative risk aversion of 4, their model gave young households with a large housing share a financial portfolio of 40% equities and 60% bonds, and 56% equities with a housing share like that in old age. For young owners, then, the capital tied up in the home crowds out equities.

On income risk, Heaton and Lucas (2000) found that households with high and volatile business income hold fewer equities than other households of equal wealth, and that shares in one's own employer reduce the share of other equities. Many do the opposite of what theory advises: according to Benartzi (2001), about a third of the assets in large US company pension plans were invested in the company's own stock. Employees of the firms with the worst share price performance over the previous ten years put 10.37% of their discretionary contributions into their own company's stock, those of the best firms 39.70%, without this predicting subsequent performance.

Either way, it is costly: according to Meulbroek (2005), someone who holds a quarter of their wealth in employer stock sacrifices 42% of its market value, because of the lack of diversification, compared with a broadly diversified equity portfolio of the same risk. At country level, Baxter and Jermann (1997) find that the returns on human and physical capital are very closely linked in four industrialized countries. Hedging your human capital would therefore even require a short position in domestic assets, the opposite of the home bias that is actually observed.

Limits and common mistakes

• Estimates, not account balances: human capital and the present value of a pension depend on the discount rate, growth and life plans. One percentage point more on the discount rate (6 instead of 5%) cuts the present value in the example by a good $100,000. Work with ranges.
• Not tradable: you cannot sell human capital, nor borrow against pension entitlements. Large total wealth is no help if the washing machine breaks down tomorrow; you still need a liquidity reserve.
• A home is also consumption: it cannot be reallocated like an ETF. If you see it purely as an investment, you underestimate moving costs, ties to the place and quality of life.
• Double counting: if you include human capital, you must not count future contributions as wealth a second time, because they are part of it.
• Taxes and inflation: present values should be calculated consistently, either in nominal terms with nominal interest rates or in real terms in today's purchasing power.
• Not advice: the balance sheet puts risks in order; which allocation suits you also depends on your goals, family and nerves.

How Portfolio Lab calculates it

The Financial goals page brings your portfolio and life planning together in one payment schedule. Contributions, recurring income such as a pension, rent or part-time work (net) and withdrawals are rows with an amount, frequency, period, inflation linkage and priority; so are one-off goals such as the down payment on a home or a car. Recurring income covers expenses in the same month directly. Only the portfolio is simulated, using the returns of a portfolio from your Grid, by bootstrap or parametrically across many paths, optionally with a glide path between two portfolios.

For present values, the ALM page is a good fit: enter future income or savings contributions as a contribution with growth, and expenses as a liability (at least one is required). The page discounts both at a fixed discount rate (default 3%) and shows the present value of the contributions next to that of the liabilities. This is a quick approximation for human capital or the present value of a pension. Portfolio Lab does not simulate changes in the value of a home, car or human capital; they only enter as payments that you specify yourself. Details are in the Financial goals methodology and the ALM methodology.

This article explains a method; it is not investment or tax advice. Worked examples are simplified and rounded. All terms in the glossary.