Many of my friends and colleagues have taken a serious hit since the financial and property market meltdown in 2008. Indeed, much of what people worked for all their lives has vanished as their asset values fell off a cliff. Some have even lost their businesses and others are grappling with serious negative equity and massive debt attached to their real estate. But even as everyone wrestles with these financial challenges, they’re finding new opportunities…and these opportunities are not under their mattresses!
There is always opportunity in crisis. On a personal level this is a great time for re-assessing your life goals and values. From a wealth building perspective, apart from snapping up distressed assets at bargain-basement prices, possibly the true financial opportunity is something less obvious. Perhaps it’s the opportunity we have to realign our thinking regarding wealth and how we build it. Here’s an outline of 4 steps you could take in order to start rebuilding your wealth.
Re-Building Wealth Step #1: Re-assess Your Portfolio
Chances are your investments are in totally different shape to where they were before the financial crisis. If you were an active investor, some of your stocks or real estate values may have taken a serious hit. At this point, it is your call whether to hope they will someday rebound or cut your losses. If the yields are holding up on your real estate it may be worthwhile to ‘trade out’ of negative equity if positive cash-flow is still being generated. If any of your investments have produced capital gains, cashing in now could be a good idea and provide some capital for better investments. Re-assessing your portfolio is a great first step in rebuilding wealth.
Re-Building Wealth Step #2: Re-balance Your Portfolio
Whether you were actively investing or more passively sitting on your assets, the financial crisis has probably taken your portfolio out of alignment. Balanced asset allocation is critical to long-term investment performance and wealth building. Taking your risk tolerance and investment horizon into account will help work out what asset allocation works for you. Just because certain stocks might be performing well at the moment doesn’t mean you should go chasing stocks and switch your cash out of bonds if bonds is where you need to be at right now.
Re-Building Wealth Step #3: Rethink Your Wealth Building Strategy
In addition to seeking out high-performing assets, a fundamental rethink on how you build your wealth may be required. It may mean employing wealth building strategies that were put off during boom times. Perhaps becoming financially literate should be a key objective right now. Rather than placing all your chips on high-performing stocks or property maybe you need to earn your right to invest and build up a solid foundation of cash or cash-equivalents (e.g. money market accounts, certificates of deposit etc) and bonds first. It’s recommended that at least 10% of your investment portfolio should be in cash or cash-equivalents at all times. This ensures you remain liquid so that a. You have funds to handle any financial circumstances ahead and b. You have funds to readily avail of possible investment opportunities. I think that many of us were guilty of some fundamental wealth building blunder by being over invested in real estate and stocks without first having a solid base of cash, cash equivalents and bonds. Now is the time to re-adjust this imbalance.
Re-Building Wealth Step #4: Focus on Growing Your Wealth
So, you’re keeping winning investments or cash them in, weeding out the losers from your portfolio and realigning your asset allocation. What next? Well, now it’s time to focus on increasing your returns and growing your investment portfolio. Whilst paying down debt, especially what I call ‘bad debt’, is hugely important, equally so is re-building your wealth with sound and advantageous use of ‘good debt’. Focusing on building wealth is critical so that the focus isn’t on debt reduction only. Apart from hunting down real estate or other business opportunities in your state or country you really must think and act globally. You simply can’t afford to rely on any one economy so don’t be afraid to seek out opportunities in foreign territories and emerging markets. Diversification by both asset type (stock, real estate, bonds etc) and geography has never been more appropriate.
So, rather than ever waiting for markets to change you can take charge of your own financial bailout and re-build your wealth. Re-assess and re-balance your portfolio. Rethink your wealth building strategy and then focus on growing your wealth.