Are you a growth stock or income stock? On the surface it seems like an odd question. However, this may be one of the most important questions you can ask yourself. The answer to this question may dictate how you live your life for decades to come.
We often focus too much on how we invest our wealth, but not enough on how we invest ourselves. In fact, how you invest your human capital is probably the most crucial investment decision you need to make, much more than the mutual fund you should pick for your IRA.
Are you investing your time and energy in a career that has high job security, steady income, but no personal growth? Or are you working in a startup getting paid in stock options but may lose your income source any second?
Or maybe somewhere in between – are you devoting 80 hours a week to a job that pays well but not giving you transferrable skills so you are stuck where you are forever, unless you take a pay cut?
In other words, if you are a public traded company, are you a growth stock or an income stock?
Growth vs. Income
Perhaps I should first define what growth stocks and income stocks are. In equity investing, a growth stock is the type of company with potential to increase in price over time, but currently does not have the profit or earnings to support it.
Think Amazon in the first 10 to 20 years of its existence. Even when its concept has gotten customer support and brought revenue, the company continues to dump huge amount of cash into building more infrastructure and innovation. Its early investors saw the price of their stocks soar, but unless they sold the stocks, they didn’t reap any benefits. They own equity that does not provide immediate reward like cash.
On the other hand, there are established companies that have a proven business model and operate in a fully mature market. They are able to continue getting relatively steady profits even when the economy tanks and unemployment goes up. Think Coca Cola. No matter how bad things are, people need to eat and drink.
Without the need to invest heavily for future growth, these companies have the profits to support paying high dividends every quarter. The investors may not see a lot of increase in stock prices, but they will get the cash to spend in return. We call these income stocks.
Are you a growth or income stock?
In essence, what this question is getting at is how you live your life. There is no right or wrong answer, only preferences. Your choice may change depending on the stage or circumstances of your life, and also your personality and risk tolerance. In other words, how you make a human capital investment is similar to how you make a financial investment. You should make decisions based on the life you wish to live.
Is your current job a growth job or an income job? Do you want a growth job or an income job? When you think about your career decisions this way, it will give you clarity and help you align your expectations with what you do.
Nevertheless, it’s not always clear if what you have is giving you growth or income.
For example, you may have been jumping from one corporate job to the other over the years, and in the process see your salary doubled. You may think that you are on a growth path. However, if you take a hard look at your skills, you may find that you have not grown as much. When the next economic down turn and layoffs hit, you may be out of a job and not able to replace your previous income.
So even though your income was growing, your human capital did not grow. You were working for a steady income, not your intrinsic value.
On the flip side, your company may have given you a lot of responsibilities, but not the corresponding pay raise. If you have truly earned your human capital, you will be able to find another employer that appreciates your value and pay accordingly. Or your current employer will realize they need to increase your pay to keep the critical knowledge you have.
Your income may not have grown, but you were working for growth, and eventually one day it will reflect in your income.
Owning a business
There are times investing in human capital and financial capital is one and the same. That’s when you own a business.
If you are starting a business, it will be helpful to know whether you want the business to bring income potential or growth potential- a decision that will determine different ways to run your business and invest in yourself.
When I became self-employed, I had not made any income for two years due to the international moves. Therefore my focus was on how I could generate take home pay. While many other first or even second year entrepreneurs dig into savings or get into debt, I was cash flow positive from the very beginning. I was very reluctant to put my earnings back into the business.
Nevertheless, after several years in business, I found the income approach has its draw back. Lower upfront investment means I have slower growth momentum, since I do not have enough resources beyond my time and energy to increase the income stream. At the same time, I see those who devoted more resources and endured more years of low income have a steeper growth path.
Of course having a relatively predictable yet smaller income is not bad. It may be just what you need given your circumstances. I thought that I would be content with this model, until I am not. I realized that in order to grow to the next level, I need to take some risks instead of expecting steady income.
Some people have coined the term “lifestyle business” to describe the self-employed who just provide a steady income for themselves. I’m not a big fan of the term, but it is a good way to start thinking about why you want to start a business. Do you just want to be the income stock, or do you have the ambition to grow the business equity beyond what you put in? It is a decision you have to make eventually.
How to balance the risk
Your human capital and financial capital make up your life. It makes sense that you look at the decisions on both fronts together and arrive at the perfect balance.
For example, if you like to take the growth approach with your career where your compensation is highly sales driven, perhaps you would want to take less risk on the wealth you have already accumulated. Or if your income is highly dependent on one high growth industry, you would want to steer your investments away from the same industry. This way you ensure your income and wealth are diversified into less correlated asset classes, and won’t be wiped out by one single economic event.
On the other hand, if you are in a highly secure, low growth job where nothing you can do will change your pay, then perhaps being slightly more aggressive with your investments is the way to go. This allows you to participate in the economic growth that may be delinked from your human capital.
It doesn’t mean that you can’t be conservative or aggressive in building both your human capital and financial capital. In fact, since we usually lean one way or the other, we tend to manage our human capital and investments the same way. However, it’s important that you consider the risk you are taking in both fronts and evaluate your life decisions this way. You may have more capacity to take risks than you realized.
Growth and Income?
Lastly, I don’t want to diminish the possibility that you can go for both growth and income for your career. You are able to take a balanced approach to investing your human capital, just like the way you do with your financial capital. Nonetheless, growth is on one side of the spectrum, and income the other. You cannot maximize both, but you can pick a good combination of both.
Needless to say, if you are in a career path where there is no growth and little income, it’s time for you to consider changing your direction. Don’t settle for a position that does not utilize or build your human capital. It’s like investing in the stock of a company that is going bankrupt. May you realize your potential and find the right balance of growth and income for your career!