Managing Your Investment Portfolio: Part Two
Your Resources

by Gerald Townsend, Financial Editor
February 2010

Last month we kicked off a year-long series on "Managing Your Investment Portfolio." The first installment discussed the important step of setting goals that stretched us, but were still realistic. It also pointed out the difference between "financial risk capacity" and "emotional risk tolerance."

With goals identified, the next step is to identify the resources available to provide the capital for your investments.

Assets
You may consider your existing assets as investments already, but keep in mind that not all assets fall into the "investments" category. Cars, boats, furniture, electronic items, jewelry, clothing, and many other items are certainly assets - but are they truly "investments?" An investment is an item of value that you own with an expectation that it will provide you with future income, appreciation, or both - and consumption assets, such as those above, probably don’t qualify.

What about a home or other real estate? Certainly real estate may be an investment, although I’ve never considered a home as an investment in quite the same way as other investments.

The more common investment assets for most of us are cash savings, stocks, bonds, annuities and mutual funds - whether these are held in personal or retirement accounts.

A big challenge for many is increasing the percentage of their assets that are truly investment assets vs. consumption assets.

Debts
Your first thought might be, "Wait a minute, a ‘debt’ is not an asset." You are correct - and that is the problem. When we take on debt for purchases of consumption assets (cars, furniture, etc.) we are borrowing money - and paying interest - for an asset that is guaranteed to go down in value. Even worse, when that debt is incurred for lifestyle expenses (eating out in restaurants, travel, etc.) we don’t even have an asset to show for it.

On the other hand, debt can be used in an intelligent way to acquire investment assets. Purchasing a home or other real estate normally involves a mortgage, but an asset is obtained that is hopefully appreciating - the last few years notwithstanding.

Debt may also be incurred to start or acquire a business, and this might also be an acceptable use of debt, as the goal of a business is to generate income.

Debt is a wonderful servant, but a lousy master. It presumes on tomorrow.Income & Expenses

Income & Expenses
Income is not an asset, but it is the source of future assets. Everyone’s income is limited - we all must learn to live within our means. Income is transformed into assets only when expenses are controlled and surplus income remains - but this is a difficult thing to accomplish. Everyone has desires greater than their income.

The only successful way to turn income into assets is to immediately divert and convert the income the moment it arrives. This is why funding a savings account via payroll deduction or contributing to a 401(k) plan works. If you never actually receive the money you learn to live on the net amount of your paycheck.

Expense control is vital. There are countless stories of multi-millionaires squandering fortunes on lavish lifestyles. Often it is not just one big expense, but many small ones. Recall the timeless wisdom of Benjamin Franklin who said, "A small leak can sink a great ship."

Gerald A. Townsend, CPA/PFS, CFP^®, CFA^® is president of Townsend Asset Managment Corp., a registered investment advisory firm. Email: Gerald@AssetMgr.com

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