Money to Make New Money = Portfolio Management
If you are able to apply the following 3 rules into your Personal Economy, congratulations, you have come to the next horizon after cash flow management, which is portfolio management.
1. Don’t let debt rise faster than income
Because your debt burdens will eventually crush you
2. Don’t let income rise faster than productivity
Because you will eventually become uncompetitive
3. Do all that you can to raise your productivity
Because in the long run, that’s what matters most
With a simple and luxurious lifestyle, you provide a roof over the heads of yourself and your family, food on the table, books, and of course bills settlement in case of any sickness. You need to believe that the basic lifestyle is not expensive. Always give and share as this makes you believe you have more than enough.
Portfolios managed with the SKFH purpose for security and freedom
You create value to be able to build your income and take care of your personal cash flow management with your income and well-managed expenses (needs vs wants), and you will have surplus or extra money for the future. Thereafter, a portfolio of how this extra money or wealth allocation of the money plays a role in your life.
Your current management of your expenses (short-term funds) will determine the lifestyle you are having now, the basic lifestyle. With the predicted inflation, prepare for long-term basic living expenses needed and own a place to stay; this fixed asset could be an inherited or family house. These will provide you with security in pursuing portfolio management.
You don’t stop there, because security is not the real purpose of life, the focus is on freedom as your state of mind, the desire lifestyle and stress-free financial plan upon any expected or unexpected life events.
You can’t construct a tall building without a good foundation; you can’t pursue your desired lifestyle without the ability to afford the basic lifestyle and not the opposite. Many people are stuck the liability stage, because they upscale their lifestyle with credit while the stage of security hasn’t been achieved, which is the discipline and culture of wealth management.
Making your money work for you requires discipline, patience and skills in the culture you live, which are developed over time. Give a job to your money! Either S- Saving, K- Keeping, F- Farming or H- Hunting. Your money works in S and K for Security for personal-use assets, while it works in F and H for Freedom to upscale your lifestyle. S and K for what you need while F and H for what you want!
Increasing your surplus saving is increasing wealth, a simple discipline I have developed in increasing saving. Thus, in portfolio management, surplus money has a role in short-term saving in a fixed deposit in the bank and long-term saving in some fixed income funds.
This asset class in this portfolio could include cash, cash value in insurance policies, fixed income funds, employee provident funds and so on.
When you save, it means you have more and more money. The money will then be allocated for keeping the roof over your head, for farming (medical fees, healthcare expenses, education fee and reinvestment capital) and for hunting (investment to upscale the expected lifestyle and charity).
From the saving, you can accumulate the capital to pay for a down payment on a house to live in or for investment purpose to rent out or to resell at a good value at a good time, or other financial scheme to grow the money. The discipline which develops your good habits also develops your patience to farm for midterm financial events and skill to reward yourself to upscale your lifestyle from time to time.
The 4 aspects of wealth allocation are like 4 ships at the same sea level. When the sea level goes up, the 4 ships, namely saving, keeping, farming and hunting go up; when the sea level goes down, all go down too. If the security state of saving and keeping are well taken care of, the state of freedom is the only focus to grow the wealth. With the skills and patience well developed, you always have more money to upscale your lifestyle and the ‘ships’ of hunting and farming are always at a higher sea level than saving and keeping; you are at the stage of enjoying wealth.
What comes to your mind when someone mentions the 3Rs? Perhaps it is Reduce, Reuse and Recycle and ways to save the planet since the 50th anniversary of Earth Day was just celebrated?
A financial planner immediately thinks of Review, Reallocate and Rebalance as they help clients through a volatile market environment. These are the foundational concepts of successful portfolio management and the basis on which a thoughtful investment strategy is developed. As the expectation for continued market volatility remains, the 3Rs can help remove fear and emotion in times of uncertainty. Let’s take a closer look at each:
Review
Prior to building or making changes a portfolio, the first step is Review. A planner-client conversation is necessary to evaluate where you are in light of your personal goals. Regardless of your stage in life, whether you are retired and living off of your portfolio, working to put your children through college, or just starting to build your nest egg for the future, taking time to address these questions are an important first step in portfolio management:
- Take inventory of your financial situation. Where you are in relation to your overall goals?
- What is it that you want to accomplish, what are you investing for?
- Has your goal or time horizon changed?
- What have you done so far to move toward achieving those goals?
- Review your current asset allocation
- How are your assets currently distributed between cash, property, bonds and stock?
- Are you comfortable with the variability present in your portfolio? Does it make you nervous?
- Can you afford to be more opportunistic, or should you be more conservative?
- Review your current cash flow
- Do you have 3-6 months’ cash in hand as an emergency fund?
- Will you need to draw from the portfolio in the near term?
- Do you expect any changes to your situation that could impact your income?
Reallocate
After reviewing your overall situation, evaluate your asset allocation to serve SKFH portfolio roles, the specific components of your portfolio. How is your portfolio distributed among cash, bonds, property and stock? Depending on one’s situation and how the above questions are answered, the need for cash, protection, or long-term return will provide the outline for the appropriate asset mix. It is the allocation that determines the risk and potential reward in your portfolio.
In a well-constructed SKFH portfolio, the three main asset classes are further diversified to develop a desired allocation. Equities can be broken down between domestic and international, large and small size companies, and high growth or dividend payers. Fixed income positions are distributed largely with an eye on short verses longer term maturity and among varying credit qualities. Proper allocation allows for the possibility that there could always be something down in your portfolio; this is a feature of diversification, not a flaw. Anything can happen, like the world economy being disrupted due to a pandemic.
Redirecting one investment in favour of another is a reallocation. There are number of reasons why a portfolio reallocation may be necessary.
- Market conditions or economic outlook may place one asset class in a more favourable light over another.
- Investment performance (or under performance) may require a position to be reduced or removed.
- A change in risk tolerance or time horizon.
Your financial adviser will work to develop tactical and investment specific recommendations to global strategies, while providing guidance related to your specific risk tolerance and long-term goals.
Re-balance
Lastly, when managing a portfolio from time to time, through positive or negative market movements, portfolio allocations will stray from their intended weights. Rebalancing is the process of realigning your asset mix back to the targeted allocation. If you have set out to build a portfolio with a 70% equity and 30% fixed income allocation, market movements will cause those weights to be out of balance. Rebalancing a portfolio gives investors the opportunity to sell high and buy low (re-enter the market with re-investment capital of farming portfolio), while repositioning back to the original weights. This can be done at set time intervals, annually, for example, or as the portfolio shift demands. A good rule of thumb is making an adjustment when the portfolio is 10% from the original targets.
Re-balancing is also an appropriate strategy if your time horizon or risk tolerance has changed. Moving a portfolio along the risk spectrum either more aggressively or conservatively to be aligned with a desired allocation will help your portfolio keep pace with your current needs. This allows you to make appropriate adjustments while remaining invested while curtailing timing risk and emotional elements of moving into or out of the market.
Review your situation with financial health-check guides with a financial adviser to determine if a portfolio reallocation and/or rebalance is appropriate for your circumstances. Everyone’s situation is different but using the 3Rs can help to remove the emotion associated with uncertainty and ensure your portfolio is appropriately positioned towards the achievement of your goals.
4 Rules to Your Portfolio Management:
1. Do your net worth statement
Because this will show your actual assets vs liabilities and affordability to invest.
2. Understand your total net worth excluding personal-use assets
Because this is the net worth you would compound for investment return, and you know your real investment capital.
3. Apply the compound effect on your total net worth excluding personal-use assets
Because this will tell you how effective your portfolio management is with your portfolio mixture.
4. Apply re-balanced risk management in portfolio management
Because this safeguards your portfolio at any market economy cycle.
