The Whole Pie
When most people think of managing and measuring their portfolio, they typically only consider the investments which are held in designated brokerage accounts. These usually include such items as stocks, bonds, and mutual funds. What they should be managing is their total bundle of assets. The major assets on this list would include income properties, life insurance, the value of their business, pensions, and the family home.
A first step would be to identify the current value of each asset, and the percentage of the total of all the assets that it currently occupies. Then employ an allocation plan to determine what percentage you would ideally like each asset to occupy to meet your diversification objectives. For example a well diversified portfolio for a small business owner nearing retirement might look like this:
- Home 25%
- Real estate 15%
- Small business assets 40%
- Investments 20%
The final step is to calculate your return on investment (ROI) for each asset. You must be fair with yourself when going through this exercise. For instance when determining an accurate value and hence an ROI for your home, all costs (repairs, taxes, the cost of your time, improvements, upcoming agent selling fees) must be accounted for. Also an accurate appraisal would be required, not just a guess.
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