This study examines life-cycle optimal consumption and asset allocation in the presence of human capital. Labor income seems like a money market mutual fund whose balance in one or two years is predictable but a wide dispersion results after many years, reflecting fluctuations in economic...

Participation in the stock market is limited, especially early in life. By contrast, human capital investment is widespread, especially early in life. Returns to equity are constant across households, while returns to human capital vary. The contribution of this paper is to demonstrate that once...