Asset management is the process of building, protecting and managing your wealth over the long term. Whether you're just starting your financial journey, have accumulated some assets already or are looking ahead to retirement, implementing an effective asset management strategy is key to achieving your financial goals and securing your financial future.
This beginner's guide will walk you through the basics of asset management, providing actionable tips to start you on the path to long-term wealth creation.
Get Clear on Your Financial Goals
The first step in asset management is identifying your specific financial goals across different timeframes. This provides essential clarity and direction to inform your investment decisions. Consider both short-term goals (next 1-5 years) like saving for a house deposit or car as well as longer-horizon targets such as retirement planning or funding your child’s education. Attach specific dollar figures and target dates to each goal. This quantifies the amount you need to allocate towards different objectives. Review and update these goals annually as your priorities and circumstances evolve.
Build an Emergency Fund
Before investing towards other targets, the fundamental building block is creating a liquid emergency fund. You will probably need to have enough money to live for up to 6 months in the emergency fund. It is better if you can invest that in a high yield savings account to get the best returns.
Use Different Asset Classes
Strategically investing across different asset classes is key to growing your wealth over time. This may include:
- Cash - Includes savings accounts and term deposits providing liquidity and stability but low returns
- Bonds - Government and corporate bonds paying fixed interest rates and principal upon maturity
- Shares - Equities providing ownership of companies and aims for higher capital growth
- Property - Residential or commercial real estate holdings
Research historical performance benchmarks and target a diversified allocation customized to your risk appetite and return objectives. Rebalance this asset mix periodically.
Tax-Efficient Investing
Managing taxes can boost long-term investment returns. Two smart strategies include:
- Tax-advantaged retirement accounts like 401(k)s and IRAs - Maximize contributions as investment grows tax-free.
- Capital gains harvesting - Strategically realizing gains to re-invest, managing tax liability.
Also, hold income-generating investments like bonds, REITS and high dividend shares in tax-advantaged accounts to minimize taxes paid.
Passive Index Investing
Utilizing low-cost, diversified index funds and ETFs is a prudent way to implement your targeted asset allocation in a tax-efficient manner while minimizing investment fees. Index funds provide instant diversification and ownership of the performance of entire markets and sectors. Regularly invest surplus savings through dollar cost averaging. Reinvest all income distributions for the power of compound growth.
Review and Rebalance
Revisit your investment asset mix twice a year or when allocations sway more than 5-10% from targets. Rebalance back towards desired levels by selling assets trading high and rotating proceeds into underweight segments. This sells high and buys low to control risk and enhance returns moving forward. Also, review performance against appropriate benchmarks to identify any underperforming fund managers who may need replacing over time.
Protect Your Assets
Implementing appropriate insurance coverage and estate planning strategies protects accumulated assets from unexpected risks. Key insurances like health, life, disability and property insurance provide financial safety nets while allowing investment growth to continue uninterrupted. Develop and regularly update your will to control estate transfers to your chosen beneficiaries.
Automate Your Investing Approach
Implementing an automated investing strategy through dollar cost averaging is a simple but immensely effective way to stay disciplined and regularly build wealth over the long run. This involves setting up automated periodic transfers from your bank account or pay check to deposit into targeted investment accounts on a scheduled basis e.g. monthly or per pay cycle.
Choose a consistent amount or savings rate you want to direct towards investments like 10-20% of your income. The automated transfers then kick off your pre-defined contributions without any manual ongoing effort. Consider setting up separate automated transfers allocating savings into different buckets like retirement accounts, taxable accounts or your child's college fund as per your targets.
This recurring forced savings provides positive behavior formation. As your income grows over your career, automatically invest in the incremental surplus instead of inflating lifestyle inflation costs. Automation ensures you pay yourself first before spending temptations set in. The hands-off discipline removes self-control failure risks from the equation while seamlessly building your asset base in the background.
Managing Debt and Cash Flow
An essential complementary discipline to growing investments is intelligently managing debt and cash flow. Having excessive high interest credit card and personal loan debt drags down asset accumulation progress.
Start by listing all existing debts with outstanding amounts and interest rates. Pay off debts with double digit interest rates most aggressively to limit strangling interest costs. Aim to consolidate debts through lower cost instruments like balance transfer credit cards or even taking out lower cost loans to repay costly debts.
Aggressively pay down non-tax-deductible debts like credit cards and personal loans first before considering prepaying cheaper tax-deductible mortgage debt ahead of schedule. Develop and stick to realistic debt repayment budgets. Consider debt consolidation services if repayment is beyond capacity.
Automate bills payment, debt repayments and savings contributions for seamless cash flow management without missed deadlines or penalties. Budget via the 50/30/20 rule – allocating 50% of after-tax income to essential expenses, 30% to lifestyle spending and 20% towards savings and debt repayments. Review spending patterns monthly and trim excess or creeping lifestyle inflation to boost savings capacity and net worth over time.
Tracking expenses using budgeting apps helps enforce financial discipline. Achieving positive cash flow every month through diligent cost and debt oversight maximizes capacity for channeling surpluses towards prudent investment as per your asset management strategy.
Final Words
Follow these fundamental asset management principles to chart your course towards financial freedom. Identify your short and long run financial targets then construct and continually optimize an investment portfolio aligned towards achieving these.
Maintain an emergency cash reserve and utilize tax reduction strategies. Build wealth through passive index investing, rebalancing and performance benchmarking. Protect assets with adequate insurance coverage and estate planning. Remain actively engaged in the ongoing process. Executing these disciplines will best position you to reap rewards from compounding growth and reach your money milestones.
