A Basic Overview of Asset Management

Asset management is often used synonymously with wealth management, but you don’t have to be rich to develop a healthy portfolio. Let’s dive right in.

What Is Asset Management?

There are two common ways to view this idea. One pertains more to high-net-worth individuals who retain a financial services company, such as J.P. Morgan or Merrill Lynch, to handle their investments in a variety of products. The other way uses an account at a bank or other financial institution for checking, credit cards, debit cards, money market funds, and brokerage services. This article will focus on the first definition.

Asset management isn’t just for the wealthy. You can consider handling your financial assets at any income level. You just might not pay a professional to do the work it for you.

How Do You Acquire Assets?

Assets can come in a variety of forms, including real estate, precious metals, art, collectibles, stock market investments, and even cash. You acquire assets the same way you acquire your groceries, your clothes, and other daily needs—by buying them.

While people prefer to think of assets as something of increasing monetary value, this isn’t always the case. Assets can be either appreciating or depreciating. If you bought a house in 2007, at the peak of the housing bubble, then your home likely lost significant value in the subsequent years after the market crashed. This is an example of a depreciating asset. A home you own is also a “real asset,” which is a term that refers to something tangible. Real assets are often harder to liquidate.

What Do People Mean When They Say “Liquidate Your Assets”?

To liquidate your assets means to turn them into cash. An asset with high liquidity is something you can easily turn into cash that still retains most of its value. Treasury bills and bonds are often considered highly liquid. Real estate investments or collectibles may have low liquidity, not only because they take longer to sell, but because the value can be more volatile. Think back to the housing bubble example: If you bought a house at peak value, and then the market crashed, you would’ve lost a significant amount of your investment.

Cash is the most liquid asset, but that doesn’t mean you should never invest in other assets. In fact, you’ll lose money by staying exclusively in cash because it won’t retain value against annual inflation.

This is why you hear the terms asset allocation and diversification. Part of asset management is having various assets in different levels of risk, which helps reduce the damage to your portfolio if one doesn’t perform as well.

When Should You Consider Liquidating Your Assets?

There is no right answer as to when you should liquidate your assets because everyone’s risk tolerance, investment portfolio, and financial goals are different. You may want to consider liquidating some assets if you’re looking to make a big purchase or pay off a large debt, or if they simply aren’t performing and there seems to be no chance of them rebounding in the near future. Before making a rash decision, you should consult a fee-only financial planner.

Be Sure to Diversify

No matter which assets you prefer to focus on when building your portfolio and wealth, stick with the key principle of diversification. There is no safe investment, but spreading out your risk will help protect you in the case of a crisis or recession. Don’t just liquidate everything and panic!

[cf]skyword_tracking_tag[/cf]