When your job and your savings depend on the same thing, you own it twice

Human capital is the largest holding most people have

For most working households, the biggest financial asset is not an account balance. It is the stream of future earnings from work, which is usually worth more than everything else combined and which nobody thinks of as an asset because it does not appear on a statement.

That stream has characteristics like any other asset. It has an expected size, a duration, and a set of things that could reduce it — a sector contracting, a region declining, an employer failing, a skill becoming less scarce. Some of those risks are personal and some are shared with everyone doing similar work in similar places.

Once earnings are seen as a holding, the composition of the rest of the household’s money becomes a question about the total rather than about the portfolio alone. And the question is whether the other holdings would fall at the same moment the earnings do.

The overlap is what makes it dangerous

Consider a household whose income comes from one industry and whose savings are invested heavily in that same industry, whether through an employer arrangement, through familiarity, or through a general enthusiasm for a sector they know well. Nothing about that is irrational at the level of each decision. Together, they produce a position where one adverse event does two kinds of damage at once.

This is the point at which two separate risks become one. The household loses income precisely when its investments are worth least, which is also the moment it most needs to sell them. That correlation is what turns a difficult period into a severe one.

A property owned in the same town as the employer adds a third layer, since local property values and local employment are not independent. None of this is unusual; it is a fairly common arrangement arrived at without anyone choosing it.

Familiarity is the mechanism that produces it

People invest disproportionately in what they know: their own employer, their own industry, their own country. The tendency is well recognised and is generally described as a home or familiarity bias, and it works because familiarity feels like information. Knowing an industry well genuinely does confer some insight, which is what makes the bias persuasive rather than obviously foolish.

The difficulty is that the insight does not offset the correlation. Understanding a sector does not make your savings independent of your salary, and being right about the sector’s long-term prospects is no help in the specific scenario that matters, which is a downturn hitting both at once.

Employer share arrangements deserve a mention here because they are widespread and because their default outcome is concentration. Whether to hold or dispose is a personal decision with tax and contractual dimensions that vary by country, and this is not the place to make it — but it is worth making rather than defaulting into.

What can and cannot be done about it

Earnings cannot easily be diversified. A household can build a second income from a different source, retrain, or accumulate assets faster in order to reduce dependence, but none of that is quick and none of it is available to everyone. The realistic lever is usually the other side of the balance sheet.

That lever is a matter of avoiding rather than achieving. If the portfolio does not deliberately concentrate in the household’s own sector, employer or region, most of the overlap disappears without any clever construction. Broad holdings do this by default, which is one of their less discussed advantages.

The buffer matters more than usual here too, because it is what removes the need to sell into a fall while unemployed. A household with correlated exposures has a stronger case for a larger cash reserve than one whose income and assets move independently.

Concentration in other forms

The same reasoning applies beyond employment. A household whose assets are overwhelmingly one property is concentrated, however sensible the property. One whose savings sit entirely in a single country’s currency and economy is concentrated relative to a world that is larger than that country. A business owner whose enterprise is their income, their pension and their principal asset is the most concentrated case of all.

None of these are errors and all of them are common; concentration is often how wealth is built in the first place, and diversifying prematurely can forfeit the very thing that was working. The distinction is between accepting a concentrated position knowingly and holding one because nobody looked.

What the right structure is for any particular household depends on the security of the income, the size of the assets, the horizon and a great deal else. That is precisely the sort of judgement a regulated adviser is for, and nothing written here is a recommendation about anyone’s arrangements.