Your biggest asset is not in your portfolio

A friend at a big IT services firm showed me his portfolio last week, pretty pleased with it. A dozen names, some large cap, a bit of everything. "Looks diversified," he said.

I told him the largest position he owns was not anywhere on that screen. It is his job.

Your future paychecks have a present value, the same way a bond does. Run the numbers on a 30 year old earning a decent salary and everything he will be paid over the rest of his career can sit at a few crore. Often 15 to 20 times whatever is in the brokerage account. Early on, your job is 80 to 90 percent of your net worth. The portfolio is the small half.

Here is where it gets uncomfortable. His "diversified" equity book held about Rs 12 lakh of his own company's ESOPs, and more than half the rest sat in the same sector he draws a salary from, because that is what he understands best. So if that one sector derates 35 percent, he loses close to Rs 10 lakh, a third of the portfolio, in the same quarter the bonus gets cut and the layoff list goes around. The job, the company stock, and the "spread out" portfolio turn out to be the same bet wearing three costumes.

The lifecycle finance researchers say it cleanly: your financial capital should hedge your human capital, not amplify it. In plain terms, diversify away from your job, not toward it. Familiarity feels like an edge. In a portfolio it is just the same risk twice.

You cannot pick the offsetting names by feel. A broad, rules based basket owns what your career does not, quietly, every rebalance.

Your career already made a huge, concentrated bet on your industry. The job of your portfolio is to bet on almost anything else