Ratio of Investment Assets to Net Worth

Knowing your net worth is important for a number of reasons. For one thing, calculating your net worth makes it easier for you to place any additional money into the proper investments. Knowing your net worth also makes it easier for you to plan for long-term goals like retirement. Once you know your total net worth, you can look at the ratio of investment assets to your total net worth.

Your total net worth can consist of both liquid assets, such as individual stocks, mutual funds, bonds and certificates of deposit, as well as assets that are less liquid, such as real estate and annuities. In the case of real estate, it can be difficult to sell a home or investment property in a timely fashion, especially in a weak housing market. Annuities may charge fees or place restrictions that prevent you from getting your money when you need it.

Both liquid and illiquid assets can play a role in your overall portfolio and your total net worth. The ratio of investment assets such as stocks and bonds to other items that make up your net worth should be a function of your own needs. If you are still working, keeping a large percentage of your net worth in your home or investment properties can allow you to build long-term wealth for the future. But as you get closer to retirement, shifting more of your net worth to liquid assets, especially assets that produce income, makes sense. Shifting more of your net worth to income-producing assets gives you the additional cash flow you need as you transition from earning a steady paycheck to living off your accumulated assets.

Before you can calculate the percentage of income in each category of your net worth, you must first calculate your total net worth. Calculating your net worth is relatively straightforward. You first need to add up everything you own, from your bank accounts and CDs to stocks, bonds, mutual funds and retirement accounts. You should include the value of your home in this asset calculation as well. After you have that figure, you need to subtract your liabilities, including the amount of your outstanding mortgage, along with any car loans, credit card bills and other debts. Your total assets minus your total liabilities is your net worth.

Everyone will have a different target when it comes to the proper ratio of investment assets to total net worth. It is important to look at your own personal situation when deciding how much of your money should be in liquid assets such as stocks and mutual funds, and how much you want to invest in less-liquid assets. It is also important to check this ratio at least once a year and make any necessary adjustments to bring your net worth ratio back in line.