Lifecycle portfolio allocation for a college investor with mod. conservative risk tolerance. Based on Merton's optimal portfolio theory, the recommended equity allocation is 0%, reflecting an estimated human capital of $2,591,528. The allocation adjusts with age as human capital declines relative to financial wealth, shifting the portfolio toward bonds over time.
Future Income Value: $2,591,528 | Income-to-Savings: 51.8x
This allocation is generated by the Choi, Liu & Liu (2025) lifecycle model, which treats human capital — the present value of future labor income — as a bond-like asset in the investor's total portfolio. A college-educated worker's income stream has specific volatility and growth characteristics that determine how bond-like their human capital is. Combined with a mod. conservative risk aversion parameter, the model computes the optimal split between stocks and bonds at each age. When human capital is large relative to savings (high income-to-savings ratio), the model recommends more equities because the investor's total wealth is already bond-heavy. As savings grow and human capital depletes through aging, the allocation shifts toward bonds. The current recommendation of 0% in bonds reflects this balance given the specified inputs.