Rich Snebold

Tuesday, 24 May 2005 09:25

Asset allocation

Determining the appropriate asset allocation for your investment portfolio is more of an art than a science. And it is the most important decision you will make managing your portfolio -- not for rewards, but to control and manage risk.

To help understand the process, here are some terms you should know. Asset allocation is the process of constructing a diversified investment portfolio by combining different assets, such as stocks and bonds, in varying percentages. An asset class is a group of assets with similar characteristics, such as large-cap stocks, small-cap stocks, high-yield bonds and treasury notes.

In addition to market capitalization, stock asset classes can be further classified by investment style -- growth, value or blend. Fixed income or bond asset classes can be further classified by length of maturity, taxable or tax-exempt, and domestic or international.

Because a specific asset class has distinct characteristics from other classes, it will not perform exactly as other asset classes when market conditions change. This is good. With varying asset classes, you have the ability to construct a well-diversified portfolio, thereby reducing some risks.

Investing in several different asset classes may reduce overall volatility without sacrificing return. In some cases, it may actually enhance return.

There are many factors to consider when determining your appropriate asset allocation.

* Liquidity needs. What percentage of your portfolio should be invested in cash or cash equivalents to meet short-term capital needs?

* Time horizon. Will you need to access the principal in a relatively short period (three to five years)? If so, a conservatively built portfolio may be appropriate. A time horizon greater than 10 years allows the assumption of more risk by utilizing a combination of riskier assets and a more aggressive investment strategy. History has demonstrated that risk appears to diminish with time.

* Tax considerations. What is your marginal tax rate? Are tax-exempt or taxable fixed income securities most appropriate? How will differing tax rates for dividends, interest and capital gains affect your after-tax total return? What asset classes should you have in your personal (nonqualified) account versus your retirement (qualified) account to take advantage of the different tax rates and income tax deferral?

* Expected returns. What is your expectation of annual total returns (income plus capital appreciation) from these assets? Is 4 percent acceptable, or are you looking for 10 percent? If 10 percent, are you willing to accept the higher level of risk associated with such an expectation?

* Risk tolerance. This is where your decisions become more art than science. The previous factors are straightforward. If answered correctly, a financial adviser would be able to construct a well-diversified portfolio capable of meeting your investment objectives.

However, would you be comfortable with the resulting asset mix if your adviser recommended that 80 percent of your portfolio be invested in stocks? You are the only one who truly knows your risk tolerance. A good financial adviser or portfolio manager will actively listen to you as you articulate your risk tolerance.

The real art of the asset allocation process involves the portfolio manager understanding and validating your risk tolerance and other factors for the sole purpose of constructing a well-diversified portfolio that will meet your investment objectives. It is a balancing act between developing an appropriate asset mix based on an objective approach and a subjective understanding of your risk tolerance and comfort level.

So what is the best asset allocation for you? It is one that you understand, are comfortable with and that will help you meet your investment objectives. But most important, it is one that will allow you to sleep comfortably each night knowing that your assets are working for you within your risk parameters.

Rich Snebold is co-founder of The Family Business Center at Citizens National Bank. The Family Business Center provides business advice and expertise to privately held companies. Reach him at (888) 829-2162, familybusinesscenter@thebank.com or www.familybizcenter.com.

Wednesday, 22 December 2004 05:52

Succession success

Family business. The notion is a contradiction in terms to those who strive to separate these two spheres.

But the arrangement is a natural fit for families that work side by side each day, sharing successes and working through growing pains at home and in the office.

No two families operate under the same house rules, and businesses are no different. Each family business has unique challenges and strengths that the owner must understand before developing strategies and solutions. Often, family business owners work through a unique set of challenges as they strive to balance home and office.

Challenges such as succession planning and estate planning, payroll and administrative concerns, and human relations issues that stretch from delegation of duty to handing over the reins are a few of the obstacles owners hurdle as they nurture the family business to thrive through generations.

A number of small business owners fall into a time trap when succession planning. They don't start the process soon enough, and when they do, they have not considered the training and preparation required to groom the next company leader.

Here are some common issues owners overlook concerning succession plans, and tips on how to beat the clock and create a strategy that will result in a comfortable retirement and successful transition.

1. Don't wait too long to plan. We get calls from owners who are in their early- to mid-60s, and they are just beginning to consider the succession concept. Meanwhile, their son or daughter already is 40 years old. They've waited too long.

Start planning as soon as possible -- in your 40s or 50s. Begin having conversations with interested family members or others outside the organization who you feel will manage the company responsibly and successfully after you retire.

2. Consult a professional. Accountants and lawyers generally do not handle succession planning. Involve a consultant or adviser with experience to help you. Only a qualified adviser will be equipped to navigate you through the difficult task of preparing you to pass your lifelong dream to your successor.

3. Build wealth outside the business early on. Many business owners have all of their wealth tied up in the business. When they reach the point where they want to bring in a successor, their own future depends on the success of the business unless they cash out.

Most often, family members don't have the cash to buy out the business. Therefore, many owners face the predicament of cashing out and eliminating children from the succession plan or passing the business on to the children, risking retirement and hoping they run the company successfully.

To avoid this dilemma before it destroys your retirement potential, invest in wealth outside the business, such as pension plans and real estate. This way, you will not be squeezed by retirement security risk when determining a succession plan.

4. Involve an outside facilitator and all family members. Emotions often surface when business owners consider succession plans. Passing on the family business is, indeed, a family affair, and all members must be included in the discussion process.

Even if all siblings do not express interest in running the operation, ask for their thoughts. The goal is to avoid the fair vs. equal argument that will crop up if one child is left out of discussions.

Without an outside facilitator to help conduct these conversations, succession planning can become an emotional quagmire. A professional will first lead independent discussions with each family member to get the lay of the land.

Then, the adviser will conduct a family meeting to air feelings and discuss a workable plan for passing on responsibility once the family head retires. A professional objectifies the process and ensures all voices are heard so succession is successful.

Owning a family business can be gratifying, and working side by side toward a common goal can bring families together like no other activity. By planning ahead, you will give your business a great opportunity to thrive through management changes and ensure that the goals of the business remain at the forefront of the efforts of you and your family.

Rich Snebold is co-founder of The Family Business Center at Citizens National Bank. The Family Business Center provides business advice and expertise to privately held companies. Reach Snebold at (888) 829-2162, by e-mail at rsnebold@thebank.com or via the Web at www.familybizcenter.com.