In the last issue I covered the importance of having a correct
balance of financial assets. I described the various asset
classes such as domestic bonds, international bonds, corporate
bonds, domestic equities, international equities, hedge funds,
commercial property and commodity funds. The percentage that
should be held in each category would depend on the risk profile,
age etc. of the investor.
Financial or medium term assets, however, are only one part
of the story. There are two other major asset classes, namely
cash and fixed assets, including property. You may well be
more familiar with these than with financial assets. So let
us look at each of these classes. Whether you live in Bali
or anywhere else in the world they should all be important
to you.
Cash
This does not mean just the wad of Rupiah notes in your wallet.
It can cover cash balances in any bank account, deposits up
to one year and all currencies. This is the part of
your holding that is completely or almost completely liquid
in that you can use it to spend on anything you like at short
notice. Some of it may not be immediately available if it
is in a term deposit but usually such deposits can be broken
subject to loss of some interest. Having ample liquid funds
available at all times is an essential part of financial planning.
This applies on both the personal level, where you might suddenly
have to leave Bali for example on a medical or family emergency
or need a cash reserve to fund a pension plan and also on
the commercial level, where for example you might have a good
order book but cannot deliver for lack of cash flow or you
suffer a temporary drop in business and you do not have reserves
to maintain overheads, staff costs etc.
Financial assets
I have already covered at length the various asset sub-classes
(equities, bonds etc.) but have not elaborated how they can
be acquired and held. Well, they could be embodied in a savings
plan, pension plan, insurance policy, unit trust (mutual fund)
holdings or if you are a higher net worth investor a managed
portfolio. They can be acquired from banks, financial advisers
or even the Internet (but caveat Emptor!). They could also
comprise individual shares or stock options as well as physical
assets such as gold, jewellery, works of art, stamp collections
etc. While such assets should be treated as medium or long
term investments most of them can be turned fairly quickly
into cash if needed. The difference between these assets and
cash however is that if held for the medium or long term they
will generally produce returns well in excess of those that
can be obtained from cash in the bank. No-one gets rich by
leaving money in the bank except the bankers themselves and
those who create their own wealth on money borrowed from you!
Beware of potential short term losses if medium or long term
assets are encashed in a hurry. Sometimes you can make a lot
of money in the short term with long term assets. For example,
if you had invested in energy or gold funds (as I have suggested
in the Bali Advertiser over the last couple of years!) you
could have doubled your money and cashed in the profits very
quickly. But these same assets can also fall quickly in the
short term so should be bought only if you can hold them for
the long term and hold plenty of other assets.
Fixed assets
These can include land, property or any business you may own.
When calculating the value you should use a figure that realistically
represents what a willing buyer would pay at this point in
time. It would be unrealistic to say, for example, that your
property is worth a quarter of a million dollars if it could
take up to five years to sell it. A company with strong marketing
ability may be able to achieve a much higher price than an
individual trying to resell the property, certainly during
a period when similar properties are still being marketed.
Similarly, a business is worth only what someone will pay
for it today. And in a nightmare scenario there may be no
buyers at all. This is where fixed assets differ from financial
assets. A financial asset has a clear, known value and with
a few exceptions, can be converted to cash at that value at
any time, albeit with penalties or charges. Fixed assets,
such as a property or business may appreciate significantly
over time and produce a large capital gain or income for the
investor.
So what percentage should you hold in each major asset class?
Would you say 10% cash, 20% financial assets, 70% fixed assets?
Or maybe 50% cash, 30% financial assets and 20% fixed assets?
Let me give you some homework! First of all calculate the
percentages that actually apply currently to yourself. Then
consider what the percentages should be in your opinion if
your financial planning is on the ball. Everyone will have
his or her own opinion of course, and no doubt the subject
could be hotly debated. But in the next issue I will tell
you what the experts advise and why. Watch this space!
Colin Bloodworth is a senior financial adviser with Financial
Partners International. The opinions expressed are his own.
If you have any questions relating to personal finance you
may contact him at 021 520 8099 or
colin.bloodworth@financial-partners.biz
