How To Allocate Assets

Financial freedom is a goal that requires a road map. Financial castles are not built on shifting sands. To be financially secure one needs to build upon the Four Cornerstones of your Finances. They are Cash, Hard Assets  which include gold, stamps, rare books, and Soft Assets which include stocks or bonds and Insurance.

  1. Cash. Cash in either a deposit account or a money market instrument should be considered an asset class. Build cash to keep enough on hand to protect yourself and your family from emergencies. Build this asset first. Six to twelve months of monthly living expenses should be your goal. Remember, cash is always King. You will not want to sell illiquid or your favorite assets if times get tough.
  2. Hard Assets or Illiquid Assets. These assets are luxury collectibles which include stamps, coins, comic books, gold, silver, precious metals or hard to sell assets. This is an asset class that I categorize as usually taking over 30 days to sell, or are illiquid or have large fees. Real estate should not be considered an asset class at all. Real estate is really a great big liability with mortgage payments, property insurance, taxes, maintenance, etc. Hard illiquid assets are usually built up over time, and should be a smaller portion of your net worth because of the difficulty in selling.
  3. Soft or Liquid Assets. The two main asset classes are stocks and bonds. These investments can be sold in less than 30 days and are very liquid. The different categories of these two basic asset classes as examples are; short term bonds, long term bonds, technology stocks, large cap or small cap stocks. They are used for diversification. Stocks should be purchased when markets are low, or dollar cost averaged. Bonds should be held as a greater portion of your portfolio when you need income and wish to limit risk. They should be bought close to retirement. Purchase  quality stocks or funds in your IRA and 401k every year to your maximum contribution.
  4. Insurance. Life insurance has traditionally been purchased to replace loss of income needed to meet the survivor's ongoing expenses. This asset class is important both for the death benefit, and also for financial and estate planning purposes. There are many types of insurance; term life, whole life, variable, universal and variable universal, etc. Asset classes can vary in value due to market changes, inflation, fees and taxes. Insurance is different. Its stable death benefit is income tax free, and can also be estate tax free. Insurance can be purchased through an agent that will take the time to explain options.

Different asset classes offer different returns, therefore diversification reduces risk. Having a diversified portfolio of The Four Cornerstone Asset Classes should meet investor's goals.


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