Take Time to Learn Your Critical Numbers
By: Ralph Broadwater, MD, CFP®, AIF®
We all want to know that we have organized our financial life as well as possible so we can accomplish our goals. One of the best ways to make sure that you are “on target” is to learn your critical numbers.
If you have a good handle on your financial affairs, you should be able to quote your personal critical numbers. Take a little time to make sure that you know yours!
Your Critical Numbers
1. Net Worth
Your net worth is the shorthand for your overall financial condition. All you own minus all that you owe. (Your assets less your liabilities.) You should monitor this semiannually, and take pride in the fact that your net worth is rising over time. It is also helpful to be aware of your total liquid assets. This is your money that is invested to grow and support you in retirement. Your liquid assets are your total asset minus your home and personal property.
2. Basic asset allocation
The best way to insure investment success is to have a disciplined, organized approach to investing. You should know your basic asset allocation (percentage of investments in stocks and percentage in bonds)
Most successful investors have developed an Investment Policy Statement (IPS) that defines an investment asset mix, criteria for asset selection, and how decisions will be made about any investment changes. If you don’t know your asset mix, that may reflect a poorly organized investment process that could be improved by having an IPS.
3. Annual investment return goal
You should know the annual return that you are trying to achieve with your investments. Your return is determined by your asset allocation decision (asset mix. A reasonable portfolio annual return goal is between 5-10% depending on your specific asset mix.
4. Portfolio Standard Deviation
In addition to your investment return goal, you should be aware of the standard deviation of your investment portfolio. The standard deviation is a measure of the risk in your portfolio. This risk is measured as the likely downside (and upside) volatility of your investments. Like your annual return, the standard deviation is determined by your asset allocation decision.
5. Required investment capital to retire
You should have a rough idea of the amount of invested assets that you will need to accumulate to retire. If you do not know your required capital to retire, this may reflect poor overall financial planning, and may indicate that you have not taken care of the basic issues of having an organized financial life.
6. Cost of College Education
If you have children, you should know the amount of capital required to educate your children. The cost of college, because of inflation, will be significant and you should plan appropriately so you are not surprised.
Know Your Critical Numbers
- Net Worth
- Basic Asset Allocation
- Annual investment return goal
- Portfolio standard deviation
- Required investment capital to retire
- Cost of College Education
Spend some time and learn your critical numbers. You will have the peace of mind that you are well organized and on your way to investment success and reaching your goals.
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