Asset Deployment: The Key to Financial Success
By Hillel Katzeff, MBA, CFP, President, HK Financial
Never in our history has the deployment of assets been as important as it is today. The stock and bond markets fluctuate enormously. Real estate suddenly sky rockets. Inflation, like death and taxes, will always be a factor in our lives. It is vital that people maximize their assets' performances while minimizing their risks in order to control their finances - not have their finances control them.
There are many risks that must be reviewed in order to determine what type of investor you will be. Are you willing to ride out short-term volatility to receive long-term gains? Are you using market timing strategies and exposing yourself to missed opportunities in the market? Do you have a difficult time making reasoned investment decisions or do you have a tendency to make more emotional financial choices?
The list of questions can go on and on. However, it is important that investors take the time to answer them to ensure they are making the best decisions regarding their portfolios. Without a cohesive and strategic plan, the likelihood of reaching personal financial success is severely hampered.
Many people have substantial assets tied up in a 401(k), IRA or some other pension or retirement plan only. They simply place a certain amount of money each month into an account and expect that when they retire they'll be able to live off these assets. However, without a strategy and comprehensive plan, many will never realize the maximum return they could have on their investments.
The Assets Classes
The four portfolio asset classes - cash, bonds, stocks and tangibles - are a mix that should be incorporated in percentages appropriate for each individual investor. No formula is necessarily correct since age, amount to be invested, comfort with risk and a host of other factors come into play when determining where assets should be allocated. Because each person is going to have unique cash flow requirements, portfolios can't be managed in a cookie-cutter manner.
Investment Risk
It's not necessarily a case of safer versus riskier investments. In most portfolios, there is a place for both. It's simply the percentages of each that must be determined.
Although people may not be comfortable with a large amount of risk when it involves their money, acquiring only safer investments such as T-Bills and CDs will often not allow people to accomplish their long term goals. Inflation and taxes typically eat away the vast majority of any gains received through these investments.
The greatest risk factor to successful investors is inflation. In 1975, a first class postage stamp cost 10 cents. Today it will cost you 37 cents. The question then becomes: Is your investment that was returning 10 cents in 1975 returning at least 37 cents now?
Investors also should be wary of choosing where to allocate their assets and then let them be. It's necessary to track the performance of the portfolio in order to evaluate it and determine if reallocation is necessary. Has their been a birth, death, marriage, divorce, inheritance, retirement, new business start-up, etc.? Life-altering occasions often will indicate a need to alter a person's portfolio.
Asset Allocation
Modern Portfolio Theory, developed by Nobel Laureates Harry Markowitz and William Sharpe, is the basis upon which the vast majority of all major pension plans in the United States are rooted.
The theory is based on the concept that investors are adverse to risk, and expect to be rewarded for assuming risk and minimizes portfolio risk through their asset allocation. Asset deployment is the most important factor in the variation of portfolio returns.
Modern Portfolio Theory also is the basis upon which many financial advisors form their client's portfolios. Using this philosophy, they determine how much of a person's assets should be in stocks, bonds or cash. However, financial counselors often ignore the fourth asset allocation category, tangibles.
The Overlooked Asset Class
Tangibles are by far the most overlooked asset allocation category. Tangibles include direct ownership of land and real estate (not listed on a stock exchange), leased equipment, gold, diamonds, art, collectibles and other physical items that appreciate in value and, ideally, generate income. Because many financial advisors only deal with stock and bonds, they often do not discuss in detail the value of tangibles when asset balancing.
A complete portfolio should include assets allocated toward tangibles as well as stocks, bonds and cash on hand. It is crucial that a portfolio include tangibles to achieve complete diversity.
In the case of high inflation and high interest rates, both stock and bond prices may go down. If an investor doesn't have any tangibles, then the portfolio has no protection. With the correct percentage of tangibles allocated in the portfolio, in times of high interest and/or inflation, the tangibles should hold the portfolio's value potentially minimizing any loss.
The Financial Team
Comprehensive financial advice is key for all investors. Financial planning often goes beyond the Certified Financial Planner, estate planning attorney and life insurance agent. It encompasses an entire team committed and focused on a strategic plan created to achieve their client's goals while addressing and eliminating their financial concerns.
A financial team often consists of an CPA, tax and estate planning attorneys, insurance agents, stock brokers, bankers and a CFP (usually the coordinator) - all of whom, at times, may view each other as competition.
These advisors, consisting of people affiliated with a number of different companies, usually have no strategic alliance or comprehensive financial plan indicating their specific role in a client's finances. Each may be performing their job adequately, but without a cohesive strategy, the optimum results can't be met and are often counterproductive.
A team approach, with members all working together toward the client's financial goals, is the perfect way to avoid any conflicting advice or issues regarding the deployment of assets.
Most savvy investors want to minimize their taxes while planning for the financial future of their children, relatives and favorite charities. By using a comprehensive team, people can achieve their long-term goals from Generation to Generation.
Efficient and effective financial planning allows people to spend a minimal amount of time tending to their personal finances and the majority of time enjoying life.
Hillel Katzeff, MBA, CFP founded HK Financial, Inc., a Registered Investment Advisor and independent Financial Planning Firm to advise families with meaningful information, to effectively, clearly and appropriately guide them From Generation To Generation. Securities offered through Pacific West Securities, Inc. Member NASD/SIPC. Advisory services through Pacific West Financial Consultants, Inc.
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