You’ve probably come across the term “asset” many times in your life—long before you began saving and investing.
What is an asset? Generally, the word may be used to refer to anything of value—from a great smile to a great work ethic to a great group of friends. But when you’re talking about finances, the term asset is typically used to refer to things that have economic value to a person, a company, and/or a government.
For individuals, it can mean pretty much everything they own—from the cash in their wallet to the boat in the backyard to the baubles in a jewelry box. But usually, when people talk about their personal assets, they’re referring to:
• Cash and cash equivalents, including checking and savings accounts, money market accounts, certificates of deposit (CDs), and U.S. government Treasury bills.
• Personal property, including cars and boats, art and jewelry, collections, furniture, and things like computers, cameras, phones, and TVs.
• Real estate, residential or commercial, including land and/or structures on the land.
• Investments, such as stocks and bonds, annuities, mutual and exchange-traded funds, etc.
Those who freelance or own a company also may have business assets that could include a bank account, an inventory of goods to sell, accounts receivable (money they’re owed by their customers), business vehicles, office furniture and machinery, and, the building and land where they conduct their business.
Liquid vs. Non-Liquid Assets
When you’re building your portfolio and assessing your overall financial situation, you’ll quickly realize that all assets are not created equal.
Some assets are liquid: Liquid assets can be accessed quickly and converted to cash without losing much of their value. Cash is the ultimate liquid asset, but there are plenty of other examples.
If you can expect to find a number of interested buyers who will pay a fair price, and you can make the sale with some speed, your asset is probably liquid. Stock from a blue-chip company is an asset with liquidity. So is a high-quality mutual fund.
Some assets are non-liquid or illiquid: These assets have value, but they may not be as easy to convert into cash when it’s needed. Your car or home might be your biggest asset, for example, depending on how much of it you actually own. But It might take a while to get a fair price if you sold it—and you’ll likely need to replace it eventually.
The same goes for a business. And even if you’re willing to part with a prized collection—your “Star Wars” action figures, perhaps—you’d have to find a buyer who’s willing to pay the amount you want without delay. And if something happens to affect the market for a particular collectible—think Beanie Babies—your asset may sell at a loss or not at all.
While some investments have long-term objectives—including saving for a secure retirement—liquidity can be an important factor to consider when evaluating which assets belong in a portfolio.
Many unexpected events come with big price tags, so it can help to have some cash or cash equivalents on hand in case an urgent need comes up. General recommendations suggest having three to six months’ worth of living expenses stashed away in an emergency fund—using an account that’s available whenever you need it.
Some might also consider keeping a portion of money in investments that are reasonably liquid, such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). This way, ideally, the assets can be liquidated in a relatively quick timeframe if they are needed. (Although, of course, there’s never any guarantee.)
Finding the Right Asset Allocation
As an investor, you’re also likely to hear about the importance of “asset allocation” in your portfolio.
Asset allocation is simply putting money to work in the best possible places to reach financial goals.
The idea is that by spreading money over different types of investments—stocks, bonds, cash, real estate, commodities, etc.—an investor can limit volatility and attempt to maximize the benefits of each asset class.
For example, stocks offer the best opportunity for long-term growth, but can expose an investor to more risk. Bonds tend to have less risk and can provide an income stream, but their value can be affected by rising interest rates. Cash can be useful for emergencies and short-term goals, but it isn’t going to offer much growth, and it won’t necessarily keep up with inflation over the long term.
When it comes to volatility, each asset class may react differently to a piece of economic news or a national or global event, so by combining multiple assets in one portfolio, an investor can mitigate the risk overall.
Alternative investments such as real property, precious metals, and private equity ventures are examples of assets some investors also may choose to use to counter the price movements of a traditional investment portfolio.
An investor’s asset allocation typically has some mix of stocks, bonds, and cash—but the percentages of each can vary based on a person’s age, the goals for those investments, and/or a person’s tolerance for risk.
If for example, someone is saving for a wedding or another shorter-term financial goal, they may want to keep a percentage of that money in a safe, easy-to-access account, such as a high-yield online deposit account. An account like this would allow that money to grow with a competitive interest rate while it’s protected from the market’s unpredictable movements.
But for a longer-term goal, like saving for retirement, some might invest a percentage of money in the market and risk some volatility with stocks, mutual funds, and/or ETFs. This way the money can grow over the long-term, and there will likely be time to recover from market fluctuations.
As retirement nears, some people may wish to slowly shift their investments to an allocation that carries less risk.
Getting Some Help with the Mix
If you’re new to investing and feeling a little daunted by the many asset choices available, one option is to look at diversifying your allocation by purchasing ETFs or mutual funds.
These funds give investors who might not have the money or time to research and buy individual securities access to a basket of assets—different stocks and bonds—that are professionally managed.
Though investing in a mutual fund or ETF doesn’t guarantee those investments will increase in value over time, it’s a way to avoid some of the complicated decision-making and constant market-watching that can make investing stressful.
And you can use ETFs and/or mutual funds in your portfolio whether you choose to be a hands-on investor or take a more hands-off approach.
With SoFi Invest®, for example, investors can DIY their asset allocation with active investing, and pick out stocks or ETFs. Or they can or sit back and let SoFi do most of the work with automated investing.
Either way, one-on-one help is available from SoFi advisors, who can help set up a portfolio with asset allocation percentages that work toward individual goals.
The Importance of Rebalancing
Choosing that original asset allocation is important—but maintenance and portfolio rebalancing is also key over time. As people attain some of their short- or mid-range goals—paying for that wedding, for instance, or getting the down payment on a house—they may wish to consider where the money will go next, and what kind of account it should be in.
As life changes, it is possible that the original balance of stocks vs. bonds vs. other investments is no longer appropriate for a person’s current and future needs. As a result, they may want to become more aggressive or more conservative, depending on the situation.
Rebalancing also may become necessary if the success—or failure—of a particular asset group alters a portfolio’s target allocation.
If, for example, after a big market rally or long bull run (both of which we’ve experienced in recent years) a 60% allocation to stocks becomes something closer to 75%, it may be time to sell some stock and get back to that original 60%. This way, an investor can protect some of the profits while buying other assets when they are down in price.
Yes, it may be tempting to stick with a particular asset class that’s performing well—after all, the goal of investing is to make money. But too much of a good thing could become a problem if the market shifts—so there’s a reason to get back to that original percentage.
You can do your rebalancing manually or automatically. Some investors check in on their portfolio regularly (monthly, quarterly or annually) and adjust it if necessary. Others rebalance when a set allocation shifts noticeably.
With automated investing through an account like SoFi Invest®, investors can set a goal (or goals) with SoFi advisors and know that their investment account will automatically correct to the chosen percentages if they get too far out of whack.
The Value of Knowing What You Own
Knowing where your money is invested and having some idea of each asset’s value can provide a better understanding of your overall financial well-being.
Ready to do some math? Your assets are what you own. Liabilities are what you owe (debts such as credit card balances, student loans, car loans, etc.). The difference is your net worth. And tracking your net worth over time can help you make a plan to reach your financial goals.
If you’re only using your checking and savings statements to monitor your money, you may be missing out on some key information that could affect your financial planning.
Putting the big picture down on a balance sheet or tracking it with an app can help you see what you’re doing right and what might be going wrong. With this insight, you can adjust your investments and financial plan as you see fit.
The assets you accumulate will likely change over time, as will your needs and your goals. So, it’s important to know the purpose of each asset you own—as well as which ones are working for you and which ones aren’t. Here are some questions you can ask yourself as you mindfully manage your assets:
1. Are you getting the maximum return on your investment, whether it’s a savings account or an investment in the market?
2. How does the asset make money (dividends, interest, appreciation)? What must happen for the investment to increase in value?
3. How does the asset match up with your personal and financial goals?
4. How liquid is the investment? How hard would it be to sell if you needed money right away?
5. What are the risks associated with the investment? What is the most you could lose? Can you handle the risk financially and emotionally?
If you aren’t sure of the answers to these questions, you may wish to get some help from a financial advisor who, among other things, can work with you to set priorities, suggest strategies for investing, assist you in coming up with the right asset allocation to suit your needs, and draw up a coordinated and comprehensive financial plan.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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