Should Your Stock Portfolio Consider Your Career?

Abstract

We incorporate nontradable wealth, such as firm-level human capital and restricted stock units, in a stock-level portfolio optimization and show that minimizing idiosyncratic risk at the total portfolio level leads to a significant improvement in out-of-sample portfolio efficiency. Based on data from 2013 to 2022, with a sample of 263 US firms, we find that total wealth optimizations significantly reduce idiosyncratic portfolio risk, resulting in significant improvements in risk-adjusted return at the total portfolio level compared with a cap-weighted index. By contrast, simple company or sector exclusions are ineffective in improving total portfolio outcomes. Additionally, we show that total wealth optimizations materially reduce correlation with firm-level human capital and restricted stock units. Overall, our study provides evidence that investors may reduce portfolio risk by customizing their stock portfolios to account for the unique risk embedded in their nontradable wealth.