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For most people, their largest asset is the equity in their principal residence. This is generally considered a lifestyle asset, not an income producing asset. If you are at least age 55 (Canada) or age 62 (USA) and want to continue to live in your own home, a reverse mortgage can create income for your retirement by giving you a way to access part of the equity in your home without having to sell or move.

You cannot invest capital without being exposed to one or more types of risk. It’s impossible to avoid risk entirely – but you can manage that risk through diversification of your assets. We’ve all heard the expression “don’t put all your eggs in one basket.” The objective is to ensure that no single event could significantly reduce the value of your assets.

Five major risks of investing are:

• Capital Risk - the loss of a portion of your investment capital on equity investments due to declining prices.
• Capital Default Risk (similar to capital risk) – failure by a debtor to repay the principal on a debt instrument such as a GIC or bond.
• Currency Risk - your investment is in a country whose currency is declining in value.
• Interest Rate Risk - the risk of locking into a long term debt instrument when interest rates subsequently rise or, alternatively, locking into a short term debt instrument when interest rates subsequently decline.
• InflationRisk - loss of purchasingpower due to rising inflation.

How Diversification Can Improve Your Returns Over the Long Term

Let’s assume that Bill and Sarah each decided to invest $100,000. Bill decides he will invest his capital in a fixed income investment for twenty years earning an 8% interest rate. Sarah has decided to diversify by investing her capital equally in 5 different investments at $20,000 each. The table below is a conservative estimate of how their investment returns could look in 20 years’ time.

Allocating Your Assets Among a Variety of Investment Types

As you accumulate assets for retirement, your objective is to achieve an adequate return on these assets at a risk level that is comfortable for you. Aportfolioconsistingentirelyormostlyofonetypeofasset is not going to perform as effectively or efficiently as a portfolio with a mix of assets.

You can diversify your investment capital in a number of different ways:

• first, a mix of asset classes of cash, fixed income and equity;
• second, geographic diversification which provides a mix of different performing economies and political situations, as well as currency diversification;
• third, within a specific asset type, you could utilize different categories such as government bonds and corporate bonds for fixed income, or using large capitalized equity and small capitalized equity;
• fourth, if you are investing in mutual funds, use a variety of managers with different investment styles.

The Life Cycle of Investing

Your investment strategy should change over time, as you get closer to retirement. As you begin your working life, you have many years to earn an income and are therefore in a stronger position to handle the volatility of equity. As you near the end of your working life, you have fewer years of income generation and should adopt more of a capital preservation strategy. This is called the life cycle of investing.

• As a young investor, your investment strategy can tolerate as much as 75% equity investing, with the balance in cash funds.
• By your 40s you should diversify into a mix of cash, fixed income and equity.
• As you head into pre-retirement, fixed income should make up about 50% of your overall investment portfolio.

Designing Your Portfolio

When designing an appropriate portfolio for yourself, you needtoconsiderbothinternalandexternalfactors.Internalfactorsinclude:

• your risk tolerance
• your investment objectives
• your time horizon
• your needs for liquidity
• your financial circumstances
• your marginal tax rate

External factors that you should take into consideration are:

• outlook for interest rates
• outlook for inflation
• outlook for the domestic economy and global economies
• outlook for your domestic currency
• outlook for national politics
• outlook for federal debt levels.

Review your portfolio each time any of these factors, both internal and external, change significantly.

Don’t fall into the pitfall of making decisions based solely on the risk and potential rate of return, but instead consider them in the overall context of your portfolio. You will want to have some low risk investments in your portfolio for cash emergency purposes. But for higher rates of return, keep some high risk investments as well, so long as these high risk investments are kept to an appropriate percentage of your overall investment strategy.

Image by Gerd Altmann from Pixabay

Are you thinking of buying an existing business? There are number of issues you should consider.Get the answers to the following 16 questions during your due diligence review. The answers will help you to determine whether the business is a sound investment.

One of the biggest risks for any small business owner is the possibility of facing a lawsuit or a debt collection from creditors. If you have invested a lot of your personal assets into your business, you may lose them if your business becomes insolvent or bankrupt. Therefore, it is important to take proactive steps to protect your business from creditors before any financial problems arise. Here are some strategies that you can consider to safeguard your business assets and your investment from creditors.

a. The time to protect your business investment from creditors is before any financial problems arise.

If you fail to protect your business assets before you borrow money, incur substantial debt, or encounter significant financial problems, you may be giving your business creditors a better chance of accessing your assets and challenging any future planning you have done.

b. Understand your exposure as a principal of the business.

As a shareholder of the business, your exposure is generally limited to the amount of your investment, including your shareholdings and any shareholder loans you make to the corporation. However, various situations may arise which impose additional liability upon you.

If you have given a personal guarantee to guarantee the debts and obligations of the business, creditors may be able to sue you and attach your personal assets (by way of garnishment or seizure) to cover the amount guaranteed.

As a director or officer of the company, you may also have additional personal liability for such things as unpaid employee salaries, uncollected or unremitted sales or other taxes, unremitted payroll deductions, and breach of contract.

c. Protect your personal assets.

Prior to signing a personal guarantee, engaging in a new business opportunity or agreeing to be a director or officer of a company, you should consider the following strategies:

• If you haven’t already done so, incorporate the business as a for-profit company or an LLC to separate your personal assets from your business’ liabilities, limiting creditor access to business assets only.
• Transfer your personal assets to your spouse or some other party (at fair market value).
• Invest your money in assets which are exempt from creditors’ claims.
• Set up an asset protection trust in a foreign jurisdiction.

d. Protect the company's bottom line.

There are similar steps you can take to protect the profits of your business:

1. Establish a holding company to hold the shares in the corporation. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.
   
   A holding company is a separate legal entity that owns shares in another company, usually the operating company that runs the business. The profits of the business could then be paid on a tax-free basis to the holding company through dividends on the shares. Those profits can be reinvested or loaned back to the business in the form of a shareholder’s loan, which would ensure that cash flow remains unaffected. The business can grant security back to the holding company for repayment of the loan, making the holding company a secured creditor. In addition, the holding company can purchase equipment or land required by the business and then lease it back to the business, at a profit. These assets could then be out of reach from business creditors.

2. Set up a trust. Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   A trust is a legal arrangement that allows a person or an entity (the trustee) to hold and manage assets for the benefit of another person or group of persons (the beneficiaries). Any shares in the holding company could be transferred to the trust, and any funds paid by the holding company to the trust by way of a dividend would belong to the trust for the benefit of the trust beneficiaries. These funds would not be available to creditors even if one or more of the beneficiaries signed personal guarantees, or have other personal obligations.
   
   All creditor proofing strategies require careful consideration of taxation issues so as to avoid income attribution problems or the unexpected triggering of capital or income gains. The above opportunities and strategies represent only a sample of what ought to be considered. Each circumstance will offer its own opportunities and restrictions on planning.You should consult with a professional accountant and a lawyer before implementing any of these strategies to ensure that they are suitable for your situation and comply with the relevant laws and regulations.

3. Make a secured shareholder loan to the business secured by business-owned assets as collateral. You will then have a priority creditor claim against those assets if the business defaults.