Experts talk about diversification, asset classes, currencies, hedging, inflation, deflation, capital structure… but they rarely talk about you — specifically, your fears, your defensive position and your desired lifestyle.

As well, we tend to have a romantic notion, supported via financial marketing, that investing is designed to make us rich so we can retire to a life a leisure.  

For me, reality is far different

Here’s the process I go through to optimize my portfolio structure.  Three types of financial information are required:

#1 – An accurate income statement // clearly lay out the money coming in and the money going out – I like to look forward 12 months and review quarterly to check against actual figures.  

#2 – An accurate balance sheet // lay out all your assets and liabilities – for each of the assets/liabilities note all benefits/costs (financial, time and hassle) in a column beside them.

#3 – Create a cash flow statement that links your income statement with your balance sheet — this will let you understand how you are financing your life. If you are living off borrowings (borrowed time) then best to make that highly visible.

You can find tools for the above with a quick google search.  With my expenses, I write them down as detailed as possible then clump them into three categories: essential, discretionary and luxury.

Ultimately, your expenses and savings goals will drive the amount that you have to work.  Therefore, expense visibility, and control, is an essential step of maintaining your personal freedom.

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Now that you have a clear picture of your financial position, consider:

Your Desired Lifestyle – how do you want to live, what’s that going to take // work to convert collecting these experiences into sources of income

Black Swans – unexpected, adverse events (I like to structure my assets to protect myself, and my family) // consider how to hedge these

Macro Trends – what happens to your life if economic trends change (employment, interest rates, inflation, deflation) – focus on mitigating the changes that would impair your quality of life.

I’ll cover my take on these topics next week with a piece on Lifestyle Hedging.