Lifecycle investing and hidden human capital

John Campbell, Professor of Economics at Harvard University and co-author of Fixed, joined the Strategy Skills Podcast to explain why the financial system often works against ordinary investors and how to make better personal-finance decisions.

After decades studying markets and investor behavior, Campbell saw a pattern: even educated, high-income earners routinely make avoidable mistakes in housing, saving, and investing.

"Once I started looking at how people actually behave, I became more and more aware of how pervasive mistakes are, people are just leaving money on the table."

Those mistakes compound over time, widening inequality.

"It's what economists call a cross-subsidy, from the poor to the rich. My co-author Tarun and I feel that this is really outrageous and we should be concerned about it."

Five Key Insights

1. Financial Mistakes Compound Inequality Campbell's research shows that even when borrowers start on equal terms, inaction and misunderstanding drive divergence.

"Black borrowers are paying maybe as much as half a percentage point more on average than white borrowers… and that's just because they haven't refinanced."

Behavioral gaps like failing to refinance when rates fall transfer wealth upward.

2. Housing Choices Are Often Poorly Understood Many treat property as guaranteed wealth rather than a productive asset.

"It's a huge mistake to buy a bigger house than you need, or even more so to buy a place and then let it sit empty… you're effectively buying an asset and then throwing away the dividend on that asset."

Unused or oversized housing drains capital that could compound elsewhere.

3. Early-Career Risk-Taking Is Underrated

"Most people, when they're young, have a very large hidden asset, their earning power. For most people, that earning power is far safer than the stock market."

Because human capital is relatively stable, young investors can afford higher equity exposure and should taper risk only as retirement approaches.

4. Target-Date Funds Don't Go Far Enough

"Most target date funds are not aggressive enough early in life, and they taper down the risk taking too gradually."

Campbell argues these default products should adjust risk more sharply and reflect each investor's actual wealth trajectory.

5. Complexity Creates Confusion and Inequality

"This profusion of accounts leads to confusion. People throw up their hands. And the access to these accounts is unequal."

The U.S. system's overlapping account types favor large employers and the financially literate, leaving others behind.

Actions You Can Take Now

1. Maximize any employer match immediately.

"Certainly any kind of employer match, you want to maximize that right away."

2. Save aggressively through tax-favored accounts.

"You should be saving aggressively and you should be maximizing your use of tax-favored accounts."

3. Manage your mortgage strategically.

"Managing your mortgage is also a very important thing for people in the middle class and upper middle class."

4. Consider adjustable-rate mortgages as efficient leverage if you can manage the risk.

"The cheapest way to lever that portfolio and be involved in risky markets actually in many cases is to use an adjustable-rate mortgage… a cheap way to take leverage."

5. Use home equity as flexible credit.

"Home equity is a valuable source of credit."

6. In retirement, spend your assets, don't hoard them.

"Many people hang on to their financial assets too long and are too reluctant to tap home equity. The right way to manage retirement is a mix of annuities and reverse-mortgage borrowing… so that you can enjoy it."

7. Avoid oversized or idle property.

"If you buy an asset and then throw away the dividend, you should not expect it to deliver a high return."

8. Take more financial risk when young; scale back later. Treat your earning power as your built-in "safe asset."

9. Build an emergency fund before investing.

"It should be a priority to have an emergency fund in a safe and liquid form so that you stay out of high-cost debt."

10. Support simpler, fairer financial design.

"We think the financial system is very important for the market economy and the unpopularity of finance is really bad. We're trying to save the financial industry for itself."

Get John's book, Fixed, here: https://tinyurl.com/bdhj5zvd

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