Why do we need asset allocation? The simplest way to understand it is to diversify risk and put eggs in different baskets. Many people understand the rationale, but when it comes time to implement it, it's all thrown in the trash.
Recently, data from the China Household Financial Survey (CHFS) and the U.S. Consumer Financial Survey (SCF) showed that Chinese households have as much as 69% of their total assets in real estate, compared to 36% in the United States.
DuiCui's little helper thinks this is a scary number, which means that many families will fall into the abyss of disappearing wealth once home prices fall.
According to Gan Li, director of the China Family Finance Survey and Research Center, Chinese families are still at the level of junior high school students compared to the financial knowledge of American families, while American families have reached the level of college students.
Real estate has multiple attributes for Chinese families, such as investment and residence, and many Chinese families take real estate as an important asset allocation for their families.
However, for the general public, a single asset allocation can no longer meet the diversified needs of investors. In the long run, about 90% of investment returns come from successful asset allocation. In contrast to American families, who are more concerned about the effective allocation of financial assets, which can be more effectively diversified to reduce risks, people lack understanding and research on financial assets and are obsessed with the value-added function of real estate.
When it comes to asset allocation, how to balance return and risk?
It is not easy to set up a good product structure. Because different clients have different requirements for risk and return. Like European and American investors they look at the investment horizon not three or five years, but thirty or fifty years.
But Chinese investors have a greater demand for liquidity, closed period for him one or two years is barely acceptable, more than three years many investors feel that it is too long.
House - a wealth carnival
Chinese families' obsession with buying houses to increase their value is not without any basis. According to the National Bureau of Statistics, in 2016, the price of new commodity residential units in North China, Guangzhou and Shenzhen increased by 40% compared to 2015, while second-tier cities grew by 16% and other cities grew by only 4%.
CHFS data show that in the past six months, the proportion of urban households without a home buying a new home was 4.9%, the proportion of households that already had a suite and then bought a home was 5.3%, and the proportion of households that already had multiple suites and then bought a home was even higher at 5.9%, with the proportion of wealthy households (total assets in the top 20%) buying a home as high as 8.1%.
This set of data confirms that the real culprit of the rising house prices is not the fresh home buyers, but the landed gentry who have a suite or even more suites.
It is evident that the wealth has been redistributed with the rise of house prices, from families without houses to families with houses, and the wealth is increasingly concentrated in the hands of a group of people who made their fortune by buying houses.
So, the dilemma of negative growth of family wealth in addition to property, in addition to the reasons for the individual investor, where is the responsibility of the market? In recent years, China's rapid economic development, the pace of international integration continues to accelerate, the market continues to breed new opportunities, new investment varieties and financial products have emerged, but in the rich investment channels at the same time, the crisis also came.
Where is the crisis?
The current state of asset allocation of the whole population betting on property has at least two extremely frightening risks.
At the level of society as a whole, property is sucking the rest of the economy dry.
As we have seen from past experience, many people have gained massive wealth by speculating on property. This experience of great wealth is creating a demonstration effect, and more and more money will then continue to pour into the real estate sector.
What could these funds have been used for if not for buying houses? Consumption, investment in real estate, entrepreneurship, allocation of financial assets, etc. ...... these are all optional ways.
But with the expected psychological expansion, the money eventually flowed into the property, ultimately inhibiting consumption, investment in real estate, entrepreneurship, allocation of financial assets ...... caused by the rise of one industry, the situation of the decline of a hundred industries.
Once this only the only seedling also decay, the whole society will fall into the situation of all the disaster, so we see that in order to reduce the risk, many cities have introduced a policy of restricting purchases and loans, all of these flows in the money temporarily deadlocked, want to come in the money temporarily also kicked out. The whole deal is in freeze mode.
On a personal level, property is pushing investors to the edge of a cliff.
Why are many people superstitiously buying property to get rich? Because the expectation is that it will go up. Why so sure? Because China's housing prices are underwritten by the government and are unlikely to fall.
Almost no one has done any research, just read a few hydrological articles on the Internet, or just see the firm house prices in the north, Guangzhou and Shenzhen over the years, then came to such a conclusion.
In fact, the bubble is most logical, just like Wenzhou and Hainan back then, when everyone bought houses under the psychological effect of expecting it to rise, the bubble was like a tornado that scraped away those money hidden in the houses.
Professor Zhu Ning, vice president of the National Institute of Finance of Tsinghua University, believes that
Inside the bubble, expectations determine everything. The scary thing in this is that because this price is artificially pushed up, and is expected to rise pushed up, once it does not rise, will not go sideways, either up or down.
The risk is relatively manageable if you fall at a low level, but if you fall very sharply at a high level, the risk is great. It's not just a risk for homebuyers; the bigger risk lies with the banking system or the economy as a whole.
Translate this sentence: while believing that home prices will go up, you must realize that they will also go down, which is due to the laws of the economy, without a hint of luck.
Are you ready to save yourself when housing prices fall?
In fact, it is very difficult to save yourself when a crisis has already occurred, but it is still possible to save yourself before the crisis comes.
For families who have bet all their assets on property, what they need to do is to get rid of a house in a second, third or fourth-tier city.
The money cashed out can be used entirely to invest in financial assets, including insurance, stocks, funds, fixed income products, trusts, etc., and gradually build up overseas dollar assets according to the plan.
This is like diversifying the investment risk that is concentrated in one place. By sharing the risk of different financial products, the overall asset allocation risk is reduced, thus the overall investment return is more inclined to be stable.
How should family assets be allocated?
Echoing the theme, let's understand what exactly is family finance? How to develop a scientific family asset allocation?
Making the best allocation of a family's assets based on its balance sheet and cash flow is family finance.
A family's money serves many different purposes, so the best and reasonable family asset allocation must be considered, including which funds are used for aggressive investments, which are allocated as protection, and how to arrange daily consumption. In the family asset allocation, the real asset is the future certainty to bring a constant flow of cash, it can only be called an asset. And there are just property, is we own it, but we are still constantly paying, for example, our car, owning a home, it is the category of property. Assets are divided into physical assets and financial assets, and in foreign countries financial assets should be greater than physical assets, so that the asset structure is excellent, because financial assets are quickly realized.
We can refer to the Standard & Poor's household asset quadrant chart. Standard & Poor's has researched 100,000 households around the world with solid asset growth, analyzed and summarized their household financial management style, and thus obtained the household asset quadrant chart. It divides family assets into four accounts with different roles, earmarked for specific purposes and allocated in a reasonable proportion to ensure long-term, sustainable and stable asset growth. This chart is recognized as the most reasonable and robust way to allocate family assets. We can understand and learn the logic behind it, and use it to help families make good plans, manage the number of family assets, and develop good habits.
The first is the cash account, that is, the money that you usually spend.
Leave enough money for 3-6 months of basic living expenses, which is recommended to be 10% of the family's annual income. If you are concerned about the quality of life and luxury needs, you can also adjust the allocation according to individual family needs.
The second one is the leveraged account, which is called the life-saving money.
It can be used to solve large family expenses with high return and risk, such as social security and protection commercial insurance. It is recommended that 20% of the family's annual income.
The third is the investment income account, which is called the money that generates money.
The income and risk are both higher, such as real estate, real estate, stocks, funds, investment-linked insurance, etc. It is recommended to account for 30% of the annual household income.
The fourth account is a guaranteed long-term investment income account, which is called capital preservation money.
It is used to guarantee the principal, income and return, such as bonds, time deposits and participating insurance. It is recommended to account for 40% of the family's annual income.
The above sub-account planning of family assets we can also modify different allocation ratios according to the importance and urgency. This S&P household asset quadrant chart gives us a good reference value.
The "Insurance Four Accounts" in Family Financial Planning
In the S&P household asset quadrant chart, we can see that insurance appears in three accounts, each with a different role. However, it is not necessary for a family to allocate all financial assets to insurance, but rather to allocate them within a reasonable range. All insurance products are prepared to solve life's problems. How to do the right allocation of protection assets is the first consideration for family asset allocation, so how should insurance products be allocated? How to allocate the order and amount of insurance products?
The first "insurance account" is the personal risk protection account.
As the bearer of the family economy, we should establish personal protection for ourselves in line with the value of our life, and turn the uncertainty into certainty of life protection, which is the mission of life. Therefore, the first choice is to allocate for the breadwinner of the family, with the amount of his income for 10 years or more, in order to satisfy the original purpose of the account, and to give peace of mind to our loved ones who need to live on us.
The second "insurance account" is the health insurance account.
Health insurance is the single most effective way to prevent people from falling back into poverty due to illness, and it is a social solution to medical expenses so that people who are sick do not suffer financial hardship. This is why it is necessary to allocate to each member of the family, with a recommended amount for the cost of treatment plus 5 years of rehabilitation and loss of income. A family health insurance account is a very important way to set up a health insurance account for yourself and your family so that society can pay for the high cost of medical care.
The third most important "insurance account" is the pension account.
It is important to set up a special pension account for your old age to ensure that you have a secure old age. It is recommended to start preparing this special account for both husband and wife at the age of 30 to cover daily living needs and elderly care expenses after the age of 60. Wealth is measured by time, not quantity, so we need to prepare a pension for the number of days our wealth can sustain our quality of life when we are not doing physical labor.
The fourth major "insurance account" is the long-term investment account.
A long-term investment account is set up for the family's idle funds so that they can grow in value and the family's wealth can continue to grow. This account is a balanced account to meet the needs of children's education, quality of life, retirement life, and the wealth of three generations of children and grandchildren. It is recommended to allocate different insurance products and amounts according to the different stages of family members, and this account is an indicator of wealth freedom. As the asset allocation structure of a middle-class family, it is important to make financial income greater than the basic living expenses.
Learn about scientific family asset allocation through the four major accounts of balanced financial management in the S&P family household allocation quadrant chart, and learn about the corresponding role and priority of purchasing insurance through the four major accounts of insurance. Money management is a long-term behavior, not a short-term behavior, this is what we should especially remember and pay attention to. To be wealthy and free can not be without insurance, it is a lifesaver when the risk comes, can minimize the risk of loss, so that we are financially stable, to achieve the safety of family or personal wealth, happy and carefree life.
If you want to ensure that the quality of life does not decline, how much money you need in the future?
There is a law of 72 in finance, with interest compounded at 1%, after 72 years (72 is an approximate number, the exact value is 100ln2), the principal doubles. It is used as an estimate of how long it will take to multiply or halve an investment, thus reflecting the result of compound interest. In layman's terms, this means that with one percent compound interest, the principal will become double after 72 years, which means dividing seventy-two by one, which means that the principal becomes half in seventy-two years. If it is four percent, basically eighteen years, that is, if the principal has four percent compound interest, eighteen years later, one million becomes two million, two million becomes four million, and the reverse is half of the shrinkage, eighteen years later, one million becomes 500,000. Including inflation, we can project that if you need a million pension now, you will need two million after 18 years to meet it, and so on to understand the amount needed to ensure that the quality of life does not decline when you retire.