Sunday, October 15, 2006

I'm a Hedge Fund - and So Are You!

Few of us think of our investments outside the rather narrow context of fixed / time deposits, stocks, mutual funds, cash and government bonds, a mindset that is driven by the common financial planning approach used by banks.

However, this approach does not give us a true picture of how we are faring, as our investment assets generally include many more things that we don't take into account. What about property, jewellery, art, foreign curency, antiques (just check out the market price of that teak almirah and you'll know what I mean) etc? They should count for something, and it's quite likely a lot!

Most of these are potential investment areas as well. People make tons of money on art, for example. In that respect we are probably a lot like hedge funds, which are like mutual funds except they can invest in any asset class they need to in the search for higher returns or whatever the fund's mandate is.

[By the way, you and I could not afford to invest in hedge funds as these are generally rather exclusive and require gigantic investments to qualify]

As a hedge fund, we would be doing financial planning at a 'net worth' level rather than at the narrower level that we do today and managing our wealth as a whole, rather than as 'bank assets' and 'other assets'. We would be allocating a risk rating to our 'other assets' and treating them as part of one overall portfolio. For example, antiques should be fairly low risk but art would be in the high-risk category. Real estate risk rating would probably fall somewhere in between.

What's the Value in This?

Well, for one, you'd feel a LOT happier being that much closer to being a millionaire or whatever you want to be. It's like a free one-time bonus!

Further, you might even want to re-look your portfolio at the net-worth level based on the risk profiling your bank does for you rather than focusing only on the money you invest with them.

If, for example, you are supposed to have 25% of your money in equity (read 'high-risk assets') then see whether your stocks + equity funds + art + real estate + foreign currency add up to that. Same goes for the portion in low-risk assets: check whether your bonds + cash + antiques can make up that portion.

Hey, that's just what private banks do for their customers. And we all deserve that treatment, right?

If you can add up your household assets, then the exercise is even more meaningful because you can plan your finances at a household level rather than as two individuals, making for a more balanced portfolio. That's how my wife and I do it and it works well for us.

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