Part II · Chapter 3 · Human Capital · lesson 9
The concentration you did not model
11 min
Builds on Which skills decay, and how fast
Part II · Chapter 3 · Human Capital · lesson 9
11 min
Builds on Which skills decay, and how fast
Someone holds a carefully diversified portfolio: eleven countries, several industries, a mix of company sizes, rebalanced annually. They are pleased with it and they are right to be.
It is worth 60,000.
Their remaining working life, at their current pay, will produce something over a million. All of it comes from one employer, in one industry, in one city, for doing one thing.
The 60,000 is diversified. The million is a single position, and it is the position nobody models.
For most of a working life, the largest asset a person holds is their own future earnings. It is worth more than the house and far more than the investments, and it is the one thing never described as a holding.
It is also concentrated in at least four dimensions at once: one employer, one industry, one skill, one place. Held as an investment, that combination would be regarded as reckless. Held as a career, it is regarded as normal, and mostly it is fine — until the dimensions turn out to be correlated.
Employer. The most visible layer and generally the least dangerous, because the event is common, survivable and usually preceded by warning. Most people change employer several times without disaster.
Industry. Larger and slower. When an industry contracts, everyone in it is looking at once, the wages fall for everyone at the same time, and the skills that made you valuable are held by several thousand other people who are also available.
Skill. Slower still and hardest to see. A capability that took eight years to build can be quietly repriced by something outside your field entirely, and the repricing is not announced.
Geography. The one nobody counts. Living where your industry is concentrated is efficient in the good years and doubles the exposure in the bad ones, because the local housing market, the local job market and your own employment are driven by the same thing.
Predict
Three reasons, and they compound.
It is not on a statement. Investments produce documents with numbers that move. Human capital produces a payslip that is the same every month, which reads as stability rather than as a concentrated position that happens not to have moved yet.
The good years look like evidence. A concentrated position that has paid off for eleven years feels validated. It is the same position it was in year one, with a longer run of luck attached, and long runs are what concentrated positions produce most of the time.
Specialising is rewarded. Every incentive in a career points towards depth, because depth is what produces scarcity and scarcity is what produces pay. The thing that raises the return also raises the concentration, and there is no arrangement where you get one and not the other.
That last one is worth sitting with. This is not a case of people making an error. It is a genuine trade-off, and the returns to specialising are real.
Not the same thing
How much what you earn moves around from year to year.
The chance that the whole stream ends, and how long it would take to replace it.
Which is which? Put each one on a side.
A freelance income that swings by half in both directions but comes from nine clients
A fixed salary from the only large employer within an hour's drive
A salary in a skill that eleven local firms actively compete for
None of the following is a recommendation. Each is a mechanism, and each has a cost that has to be paid by somebody.
Sources with different drivers. Two incomes that respond to the same underlying event are one income. Two that do not are genuinely two. The cost is that a second source competes for the hours and the attention that were making the first one scarce.
Skills that transfer. A capability recognised by employers outside your current industry converts an industry event into an employer event. The cost is that transferable skills tend to be less scarce, which is the specialisation trade-off arriving from the other direction.
Not stacking the same bet twice. Holding the shares of the employer who also pays your salary means one event takes both. This one has an unusually low cost, which is why it is the most commonly given piece of advice on this subject and the one most commonly ignored.
Reserves. Money held against a stopped income does not reduce the chance of the event. It changes what the event forces you to do — a search conducted over six months produces a different outcome from a search conducted over three weeks, and the difference between them is the whole of the value.
Check
The dramatic version of career risk is redundancy. The common version is slower and gets much less attention.
A skill is repriced gradually. Pay stops rising, then stops keeping up with prices, then the roles being advertised start asking for something adjacent. No single year contains an event. Nobody is dismissed. Ten years pass and the person is earning less in real terms than they were, doing the same work at the same standard.
There is no moment to react to, which is precisely why this version is the harder one. The four layers above are worth re-examining occasionally for exactly this reason: the layer that is failing is rarely the one making a noise.