Many of the new clients who have come to me in the last 6 months did not have a strong understanding of the composition of risk in their investment portfolios and in the structure of their net worth prior to the economic downturn and ensuing stock market volatility last year.
Just like any business enterprise , the composition of your family's net worth is crucial in determining where you sit on the risk spectrum.
Now that your investment assets ( stocks, bonds, managed funds, private equity holdings, etc. ) have bounced from the early March lows, it may be considerably less painful to spend the time to re-assess your current balance sheet.Breaking your holdings out into %'s on a relative basis will give you a general overview :
Assets:
1) Investment (non-reg. / reg (RSP/RIF)
a) Liquid
b) Less liquid (penalties for early selling/ limited market for re-sale)
- Asset class : Fixed Income (Bonds/Debentures), Preferred Equity, Common Equity, Private Equity (including your own business)
- Economic Sector
- Geographic Location
2) Fixed assets: property
Liabilities:
Debt should be assigned to any of the above asset classes for a true picture of (net assets) risk.
After establishing your Net Worth and the risk apportioned to each sector and/or sub-sector, it is necessary to create a cash flow analysis from which to regard your lifestyle needs.
Simply:
Income (less taxes) less Lifestyle Expenses = either positive cash flow to be added and apportioned to your investments or negative cash flow from which we need to draw from your liquid investments (and cash holdings).
Your cash flow, now and projected into the future (either negative or positive) will then determine how your investments need to be structured.
In which case you need to look back to those %'s that you attached to your assets and make sure that there is appropriate liquidity, appropriate (or not) income being generated, appropriate allocation (or not) to investments with greater potential for growth ( and likely greater volatility).
Now that your statements are looking a little better and interest rates are the lowest in years (and will likely not remain low beyond the next 6 months) it is worth taking the time to re-assess.
There is still considerable uncertainty over the fragility of the economic rebound, which has gathered strength with enormous assistance from government spending.
There is substantial debate amongst the experts as to the timing of the recovery and the possible consequences that may result.
Understanding the risk that you carry becomes even more important as a result of this uncertainty.
I have spent 28 years analyzing risk, let me know if i can help you.
