When people talk about wealth management, they are usually talking about asset management. An asset is an economic unit that you own or control, with the expectation of a future financial benefit. If you want to increase and protect your wealth, you need a strategy for the building and acquisition of assets. Simply accumulating cash will not give you the financial leverage you need to grow your principle, while also protecting you from negative trends in the markets.
What is Your Money Doing for You?
Poor people worry about what to do with their money. Rich people worry about what their money is doing for them. Assets are the building blocks of any wealth-building strategy. Some of the key uses of assets include:
- Hedging against market downturns
- Generating cash flow
- Growing your principle
- Tax planning
- Charitable giving
- Estate planning
You need to use different types of assets to achieve different kinds of goals. One of the reasons that wealth managers help clients diversify their holdings across a variety of different asset classes is to give their clients more options for growing and protecting their wealth. If all of your wealth is in stocks or bonds or real estate, you are not only vulnerable to a downturn in that market; you also are unable to capitalize on favorable conditions in other parts of the economy. Assets are the way your money goes to work.
Do You Have an Asset or a Liability?
Assets are acquired with the expectation of future gain. But, not every investment will pay off. A liability is something that costs you money every month. If you own a stock that has a few down months, it isn’t a liability because it doesn’t cost you more money to continuing to own it. But, if you have an apartment complex with a high vacancy rate that is also losing value, that real estate investment is now a liability. A smart asset management practice requires you to regularly evaluate your portfolio. You will want to rebalance assets from time to time to shed underperforming assets that are not meeting any of your wealth management goals. You will also need to be ruthless in eliminating liabilities. Often, you will need the advice of an experienced wealth manager to evaluate whether something is an asset or a liability.
Asset Management Must be Driven by Data
It’s okay to accumulate things that cost money to maintain. You can have jet skis, vacation homes, and expensive equipment for hobbies. However, no matter how much money you have, you cannot afford to confuse liabilities with assets just because you love them. Effective asset management depends on analyzing the performance of your holdings and having an expert evaluation as to the trends in the near future and the distant future that will affect the performance of an asset. An asset that is losing value, but still producing dependable cash flow, will be treated differently than something that generates no cash flow and is losing value. You also may not want to get rid of something just because it is losing money this year. If it is part of your long-term strategy or it is filling a useful role, you may want to hold onto it. You have to examine all of the relevant data before making an asset management decision. If you let emotion rather than facts drive your choices, you will be disappointed with the results. You are building your financial empire with different asset bricks. It is your job to get expert advice about what materials you should use as you continue to build.