What Is An Investable Asset? Learn Step-By-Step

Last Updated on June 29, 2024 by Amrita

Investable asset is an essential aspect of every person’s financial life. They not only serve as a measure of your net worth but also play an important role in determining your financial stability and future investment prospects. In this article, I am going to give a detailed discussion of investable assets for your consideration so that you can take a sound decision on your investment.

Table of Contents

What Is An Investable Asset?

Investable assets are an important aspect of smart money management because they allow you to diversify your financial portfolios. These assets refer to any type of financial resources that can be easily converted into cash and invested in various securities. These include

Bank accounts,
Stocks,
Bonds, and
Mutual funds.

However, it is important to note that some physical assets such as real estate, vehicles and collectibles are not considered investable assets due to their limited liquidity. They require time and effort to convert into cash, making them less suitable for immediate investment.

By having a diverse range of investable assets in your portfolio, you can mitigate potential risks associated with market downturns and getting a steady source of income through interest or dividends.

In addition, understanding your investable assets is crucial for lenders who use them as a measure of your ability to repay their loans. Therefore, having a clear understanding of what constitutes an investable asset is essential for you to make informed and strategic financial decisions.

Types Of Investable Assets

Liquid Assets

Liquid assets are defined as resources that can be quickly converted into cash or accessed without experiencing a substantial decrease in value. These include cash, savings accounts, money market funds, and short-term certificates of deposit.

Liquidity is an important aspect to consider when choosing investable assets because it allows for flexibility in case of emergencies or sudden changes in the market.

Marketable Securities

Marketable securities are financial mediums that can be easily bought or sold on the market. They include stocks, bonds, and mutual funds and are considered to be more liquid than other types of assets. However, they come with varying levels of risk and potential for return based on market trends.

Real Assets

Real assets, also known as physical assets, carry inherent value and are tangible in nature. This category includes things like real estate properties, precious metals, and collectibles. Real assets can provide stable returns over time but require careful consideration and management due to their illiquid nature.

Alternative Investments

Alternative investments refer to less traditional options that may require a higher level of knowledge or expertise to navigate effectively. These include hedge funds, private equity, and cryptocurrencies. Alternative investments often have a higher risk associated with them but also have the potential for higher returns.

Understanding The Characteristics Of Investable Assets

Investable assets have certain characteristics that make them unique and attractive to investors. These traits include liquidity, risk and return, and diversification. Understanding these characteristics can help individuals make informed decisions about their investments and maximize their potential for growth.

Liquidity: What It Means And Why It Matters

One of the most important characteristics of investable assets is liquidity. This refers to how easily an asset can be converted into cash without a notable decrease in value.

Assets that are highly liquid, such as cash and savings accounts, allow for quick access to funds whenever needed. On the other hand, illiquid assets may take time to sell and could result in a loss if sold hastily.

Having a mix of liquid and illiquid assets is essential in managing wealth effectively. While liquid assets provide immediate access to funds for emergencies or unexpected expenses, illiquid assets can provide long-term growth potential. It is important to strike a balance between the two to ensure financial stability and flexibility.

Risk And Return: Finding The Right Balance

Another characteristic of investable assets is the trade-off between risk and return. This means that every investment comes with a certain level of risk, and generally, higher-risk investments have the potential for greater returns. On the other hand, lower-risk investments may offer more stability but may also yield lower returns.

Factors such as market conditions, economic trends, and asset types all play a role in determining the risk and return of an investment. It is crucial for you to assess your risk tolerance and carefully consider these factors before making investment decisions.

Diversification: The Key To Portfolio Stability

Diversification is a strategy that involves spreading investments across various asset classes to reduce risk and enhance overall portfolio stability. This means investing in different types of assets such as stocks, bonds, real estate, and commodities.

By diversifying your portfolios, you can mitigate the impact of market fluctuations on your wealth. For example, if one asset class experiences a downturn, other assets may perform well and balance out the losses.

Implementing asset allocation and choosing different investment vehicles are key strategies for achieving diversification.

Why Does An Investable Asset Matter?

Investable assets are an important wealth indicator for financial advisors and lenders for various reasons. They provide valuable insights into an individual’s financial standing, including their net worth and potential for future investments. Here are some key reasons why investable assets matter:

Helps in investment planning: Financial advisors and investors use investable assets as a guide to determine the amount of money available for investments. It helps them create a personalized investment plan that aligns with an individual’s financial goals.
Determines creditworthiness: Lenders, banks, and credit issuers assess an individual’s investable assets before extending credit facilities like mortgages or personal loans. The more investable assets one has, the more creditworthy they are perceived to be.
Indicates financial stability: A healthy amount of investable assets is an indicator of financial stability. It shows that an individual has enough resources to cover their living expenses and also have surplus funds for investments or emergencies.

How To Calculate Investable Assets?

Calculating your investable assets involves a simple formula: adding up all your liquid and near-liquid assets while subtracting any debts or liabilities. Here’s a step-by-step process on how to calculate your investable assets:

Make a list of all your liquid and near-liquid assets, including cash, checking and savings accounts, CDs and money market accounts, stocks, bonds, mutual funds, retirement accounts, trusts, etc. You can also include any investment properties that generate regular income.
Add up the total value of these assets.
Make a list of all your debts and liabilities, such as credit card balances, mortgages, personal loans, car loans, etc.
Subtract the total amount of debts from the total value of your assets.
The resulting number is your investable assets.

It is recommended to recalculate your investable assets at least once a year or after any significant life event, such as a job change, marriage, or inheritance. This will help you keep track of your financial progress and make adjustments to your investment plan if necessary.

Net Worth Vs. Investable Asset

Both net worth and investable assets are essential measures of your financial health, but they differ in their scope and purpose. Net worth takes into account all assets and liabilities, providing a comprehensive overview of your overall financial standing.

On the other hand, investable assets focus solely on liquid and near-liquid holdings that can be invested for potential returns.

While both metrics have their merits, each has its limitations as well. While net worth may give a more accurate representation of your wealth, it is susceptible to fluctuations due to market values associated with tangible assets.

For example, if the housing market experiences a downturn, it could significantly impact an individual’s net worth by decreasing the value of their property.

On the other hand, using investable assets as a measure of financial well-being may not give a complete picture. It excludes tangible assets, which can also hold significant value and contribute to your overall wealth.

However, investable assets offer a more stable and predictable measure since it focuses on liquid assets that are readily available for investment.

Ultimately, the choice between net worth and investable assets as a measure of financial health depends on your goals and priorities. For those who prioritize liquidity and potential investments, investable assets may be more relevant.

On the other hand, for individuals with substantial tangible assets, net worth may be a better metric to assess their overall financial standing.

Don’t Let These Misconceptions Hold You Back From Building Wealth Through Investable Assets

You may have come across some common misconceptions that have led you to believe investing is only for the wealthy, too risky, or overly complex. However, these beliefs are not entirely accurate and may be holding you back from utilizing your investable assets effectively.

As an individual, regardless of your income level, it is important to understand that investing is accessible to everyone.

You do not need a large sum of money to start investing and building personal wealth. One important strategy for successful investing is to begin small and maintain a consistent contribution pattern over time. This way, you can take advantage of compounding returns and see growth in your portfolio.

Another misconception about investing is that it is inherently risky. While there is always some risk involved with any investment, there are ways to manage and minimize it.

By understanding your risk tolerance and diversifying your portfolio, you can make informed investment decisions that align with your comfort level. Additionally, it is important to do thorough research and seek advice from financial professionals before making any investments.

The idea that investing is overly complex may also be holding you back from getting started. While there are certainly more advanced strategies and options for experienced investors, there are also plenty of simple and straightforward investment opportunities suitable for beginners.

It is essential to educate yourself on the basics of investing, but you do not need to be an expert to start building wealth through your investable assets.

With a little bit of knowledge and guidance, you can confidently navigate the world of investing and use it to your advantage in achieving your financial goals. So do not let these common misconceptions hold you back from utilizing your investable assets and taking control of your financial future.

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The Impact Of Taxation On Investable Assets

You should always keep in mind the tax implications of your investable assets when managing your finances. This is especially important when it comes to Capital Gains Tax, as it directly impacts the profit you earn from selling investments.

It is crucial to stay informed about current tax rates and explore strategies that can help minimize this tax burden. In addition, consider utilizing savings accounts such as 401(k)s and IRAs, which offer attractive tax benefits and incentives.

These accounts can be powerful tools for building your financial future while also keeping your tax liability low. When creating an investment portfolio, it is essential to seek out tax-efficient strategies that will help maximize the returns you keep after taxes.

Consider consulting with a knowledgeable financial advisor who can assist in implementing these strategies and help you make the most of your investable assets. By staying informed and utilizing tax-efficient investment strategies, you can effectively manage your finances while minimizing your tax liability.

Key Steps To Building Your Investable Assets

As you embark on your journey towards financial wellness, building a strong foundation of investable assets is essential.

These assets not only provide a source of income but also serve as a safety net during times of financial uncertainty. To help you methodically and strategically build your own investable assets, here are five key steps that you should consider.

1. Take Advantage Of Matching Contributions In Your 401(k)

Your 401(k) is more than just a retirement savings plan – it’s an opportunity for wealth accumulation. If your employer offers matching contributions, make sure to contribute enough to qualify for the full match.

By doing so, you’re essentially receiving free money that can grow over time and add to your investable assets. Missing out on this benefit means leaving potential wealth on the table.

2. Prioritize Building An Emergency Fund

Before diving into more volatile investments, it’s crucial to have a safety net in place. This is where your emergency fund comes in – ideally covering three to six months of living expenses.

Having this cushion ensures that unexpected financial setbacks won’t force you to liquidate investments at inconvenient times, allowing your other investable assets to continue growing without interruption.

3. Diversify Your Investments For Reduced Risk

One of the key principles of investment is diversification – the idea of not putting all your eggs in one basket. By diversifying across different asset classes and sectors, you can minimize the risk of significant losses.

If one investment underperforms, others may perform well, balancing out the overall performance of your portfolio. Diversification also helps smooth out the investment journey, mitigating drastic ups and downs.

4. Harness The Power Of Compound Interest

Compound interest, also known as the ‘eighth wonder of the world’, has gained recognition for its remarkable ability to greatly increase wealth over time through exponential growth.

By reinvesting earnings and allowing your assets to grow consistently, you can tap into the full potential of compounding. The key is to start early and be consistent in your investments, giving them time to grow and compound.

5. Rebalance Your Portfolio Regularly

As your investments perform differently over time, it’s natural for your portfolio to stray from its original asset allocation. Rebalancing involves adjusting your portfolio back to its target allocation, ensuring that you maintain your desired level of risk.

It can also offer the opportunity to buy low and sell high, optimizing the growth of your investable assets. Make it a habit to regularly review and rebalance your portfolio for maximum potential gains.

Tips for Managing Your Investable Assets: A Guide for You

Managing your investable assets can feel overwhelming, but it doesn’t have to be. By following these essential tips, you can navigate the financial landscape with confidence and optimize your portfolio for long-term growth.

Stay Informed

One of the most critical aspects of managing your investable assets is staying informed. Keep up to date with market news, interest rates, and global events that may impact your investments. By staying informed, you can make educated decisions about when to buy, hold, or sell your assets.

Diversify Across Asset Classes

Diversification is crucial in mitigating risk in your portfolio. By spreading your investments across different asset classes such as stocks, bonds, and commodities, you minimize the chance of one investment significantly impacting your overall portfolio.

Diversification also allows for potential growth in different areas, providing a more balanced approach to investing.

Regularly Review And Rebalance

As your investments grow and change over time, it’s important to regularly review your portfolio and make adjustments as needed. This may involve rebalancing your assets to align with your original strategy, ensuring that it still reflects your financial goals and risk tolerance.

Leverage Technology

In today’s digital age, technology can be a powerful tool in managing your investable assets. Take advantage of budgeting apps, investment analysis platforms, and automated advisors to help track and optimize your portfolio effectively.

Seek Professional Advice

While conducting your own research is valuable, seeking advice from a financial advisor can provide invaluable insights and guidance. They can offer personalized advice, identify potential investment opportunities, and help navigate complex financial scenarios.

Prioritize Liquidity Needs

It’s essential to always be aware of your liquidity needs when managing investable assets. If you anticipate needing a portion of your investments for upcoming expenses, make sure that a portion of your assets is easily accessible and not locked into long-term investments.

Understand Your Risk Tolerance

Every person has a unique risk threshold when it comes to investing. It’s important to assess and understand your risk tolerance to ensure that your portfolio aligns with your comfort level. This will also help you make informed decisions about adjusting your investments in response to market fluctuations.

Monitor Fees And Expenses

Don’t overlook the impact of fees and expenses on your investments. The costs associated with investing, such as brokerage fees, fund management charges, or transaction costs, can add up over time. Stay informed about these expenses and look for ways to minimize them.

Avoid Emotional Decision Making

The financial market can be unpredictable and emotionally charged. It’s essential to make investment decisions based on research, strategy, and long-term objectives rather than letting emotions drive your choices. Avoid making reactionary changes to your portfolio based on short-term market sentiments.

Plan For The Long-Term

While it may be tempting to chase quick profits, the real power of investable assets lies in their long-term growth potential.

Set long-term financial goals, stay consistent with your investment strategy, and resist the urge to make frequent changes. This will allow you to make the most of your investments and reach your financial goals over time.

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Conclusion | What Is An Investable Asset?

Investable assets are not only important to have, but also to be effectively managed. By understanding what they are, why they matter, how to calculate them, and more, you can take control of your financial future and maximize your investment potential.

Remember to set realistic goals, diversify your investments, regularly review and rebalance, seek professional advice when needed, and continuously save and contribute to your investable assets for long-term financial stability.

Finally, it is essential to keep a close eye on your investable assets and make strategic decisions to grow and protect them over time. With proper management, investable assets can be powerful tools for achieving financial success and security.

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