2.3 The bigger picture


What this topic covers:

  1. Getting a complete view of your wealth
  2. Understanding your net worth
  3. Your asset mix
  4. Four key asset classes
  5. Why diversification is important


Getting a holistic view of your wealth


If the aim of investing is to build your overall wealth then it’s fundamental that you have a complete view of what contributes to your total wealth. This starts with understanding what your current assets and liabilities are. Check here for more information on this.


Exercise: Understanding your net worth


This exercise is really quite simple. On one side, we line up your assets, on the other your liabilities. In other words: both sides of your personal balance sheet. The result? Your net worth.


net worth


Start by understanding your current assets and liabilities


Step 1: Work out the value of your assets by putting a dollar amount next to the following:

  • Savings
  • Property
  • Superannuation
  • Investments
  • Vehicles

Step 2: Work out the value of your liabilities by putting a dollar amount next to the following:

  • Home loan / mortgage
  • Credit card balances
  • Personal loan / overdraft balance
  • Study / student loans outstanding

Step 3: Work out your approximate net worth by simply subtracting your liabilities from your assets.



Building overall wealth to support your goals


There’s a reason we’ve asked you to complete this exercise. Not only does it give you a "big picture” view of your net worth, but it should also be clear that investing in shares is not the only way to build your wealth; it’s one part of your asset mix. Getting the right mix in your portfolio means spreading your investments across different assets.



“Never spend your money before you have it.”

- Thomas Jefferson (The third president of the United States from 1801 to 1809)


Here’s a quick reminder of the four key asset classes:


Shares

We’ve already covered shares in detail in topic 1. If you’d like a refresher, click here


Property

Property is also considered a growth investment because the price of houses, apartments, and other properties can rise over the medium to long term. But like shares, property can also fall in value and so also carries the risk of losses. You can invest in property directly – by buying a property – or indirectly, through a property investment fund.


Cash

Cash investments include everyday bank accounts, high-interest savings accounts, and term deposits.
While they offer no chance of capital growth, they can deliver regular income and can play an important role in protecting wealth and reducing risk in an investment portfolio.


Fixed interest

The best-known type of fixed interest investments are bonds. Bonds are issued by governments or companies who borrow money from investors and pay those investors a rate of interest in return. They’re considered a defensive investment because they generally offer lower potential returns and lower levels of risk than shares or property. They can also be sold relatively quickly, like cash, but it’s important to note that they’re not without the risk of capital losses.




Why diversifying your asset mix is so important


Everyone knows the phrase “Don’t put all your eggs in one basket”. Spreading your investments across different asset classes ensures you are diversifying, which helps reduce your risk. The idea is that if one investment doesn’t perform well, it can be balanced out by potential gains made with other investments in your portfolio. Ultimately, the aim is to create a mix that suits your financial goals at a level of risk that you’re comfortable with.



A quick recap on how to define your investment goals



Start thinking about your investment strategy


Now that you’ve learned the fundamentals of investing, discovered why goals are important and quantified your net worth, you’re ready to move on to the next stage of your investing journey: building your personal investment strategy. Before you get started, why not complete the quick quiz? 



Next Topic: 2.4 Quick quiz

Disclaimer

CommSec Learn is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a market participant of the ASX & Chi-X Australia, a clearing participant of ASX Clear Pty Limited and a settlement participant of ASX Settlement Pty Limited.

 

 

Disclaimer

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