How to Allocate Assets and Manage Risk based of Life Situation.

Any investment you choose must be oriented towards the time period each objective needs and the risk level each represents. The first two objectives shown on the chart have a short term maturity which means that one should focus on keeping your capital safe. For example you would never invest money that you have budgeted to buy a car in stocks due to the high risk that the stock market represents in a two-year period.

Determining the Assets and Liabilities
Your investment plan should be fixed to fit your financial situation (assets and liabilities) which come together.

To determine your financial assets and liabilities you must elaborate a Balance Sheet which enumerates your assets (all valuable things you own)  and passives (all your debts). The difference between your assets and liabilities will be your real financial situation. By comparing different time period statements you will see what you can count with :

  • Devaluated or accumulated assets
  • Paid or increased liabilities
  • Real value increasing or decreasing

If you have the budget or the real value to finance your objectives you could list them by order of importance and necessity and divide your budget into the most important ones first. To determine the risk level that you can confront you should evaluate your personal situation first, meaning marital status, budget and job.

  • Determine your Situation
    Marital status: single, married, divorced, widow
  • Family: without children, little children, youngsters, adult living independently
  • Age: high school graduate, bachelor degree, masters degree
  • Budget: stable and balanced, probable raise in the future
  • Job / Career: skills, ability to increase your earnings
  • Real Value: income level, assets and real value, and portfolio size.