The sum of an individual’s financial capital (FC) and human capital (HC) less any liabilities owed by the individual is known as the individual’s net worth. Net worth is the measure of the wealth of an entity, person, or corporation as well as sectors and countries. Net worth is simply the difference between assets and liabilities.

People with substantial net worth are known as high-net-worth individuals (HNWI). High-net-worth individual (HNWI) is a term used by some segments of the financial services industry to designate persons whose investible assets (such as stocks and bonds) exceed a given amount.

Wealth is the possession of a large amount of money, property, or other valuable things. An investor’s total wealth is composed of both human capital and financial capital.

These four very general categories of attitude and style result from the personality typing questionnaire and may provide indications into investment-related behavior: Cautious, methodical, individualistic, or spontaneous. Investors can, therefore, be classified as cautious, methodical, individualistic, or spontaneous.

Cautious investors are one of the four very general categories of attitude and style resulting from the personality typing questionnaire. Cautious investors are generally individuals who minimize risk and have trouble making decisions. They are characterised by the following:

– They are risk averse and base decisions on feelings.
– They prefer safe, low-volatility investments with little potential for loss.
– They do not like making their own investment decisions but are difficult to advise and will sometimes even avoid professional help.
– Their inability to make decisions can lead to missed investment opportunities.
– Once they have made investment decisions, their portfolios exhibit low turnover.

Methodical investors are one of the four very general categories of attitude and style resulting from the personality typing questionnaire. Methodical investors are generally individuals who are conservative, gather lots of data, and look for more information. They are characterised by the following:

– They diligently research markets, industries, and firms to gather investment information.
– Their investment decisions tend to be conservative and because they base decisions on facts, they rarely form emotional attachments to investments.
– They continually seek confirmation of their investment decisions, so they are constantly on the lookout for better information.

Individualistic investors are one of the four very general categories of attitude and style resulting from the personality typing questionnaire. Individualistic investors are generally individuals who are confident and make their own decisions. They are characterised by the following:

– They do their own research and are very confident in their ability to make investment decisions.
– When faced with seemingly contradictory information, they will devote the time needed to reconcile the differences.
– Individualistic investors tend to have confidence in their ability to achieve their long-term investment objectives.

Spontaneous investors are one of the four very general categories of attitude and style resulting from the personality typing questionnaire. Spontaneous investors are generally individuals who are less risk-averse, base decisions on feelings. They have high portfolio turnover, chase fads, and continually want to do something. They are characterised by the following:

– They constantly adjust their portfolios in response to changing market conditions.
– They fear that failing to respond to changing market conditions will negatively impact their portfolios.
– They acknowledge their lack of investment expertise but at the same time tend to doubt investment advice.
– Their reactions to changing investment trends combined with a tendency to over-manage their portfolios leads to high turnover.

The benefits of the investment policy statement (IPS) for the client includes the following:

– The investment policy statement (IPS) identifies and documents investment objectives and constraints.
– The investment policy statement (IPS) is dynamic, allowing changes in objectives and/or constraints in response to changing client circumstances or capital market conditions.
– The investment policy statement (IPS) is easily understood, providing the client with the ability to bring in new managers or change managers without disruption of the investment process.
– Developing the investment policy statement (IPS) should be an educational experience for the client. Clients learn more about themselves and investment decision making and they are better able to understand the manager’s investment recommendations.

The benefits of the investment policy statement (IPS) for the investment adviser includes the following:

– Greater knowledge of the client.
– Guidance for investment decision making.
– Guidance for resolution of disputes. This could involve signed documentation that can be used to support the manager’s investment decisions as well as the manager’s denials of client investment requests.

The method of increasing a position size by using unrealized profits from successful trades to increase margin is known as pyramiding. An investor who is pyramiding uses additional margin from the increasing price of a security in his or her portfolio to purchase more of the same security.

Investor psychology indicates investors will form portfolios via pyramiding. Pyramiding is the concept applied to investor portfolio formation in which portfolios are created by matching layers of assets to specific goals. Each layer of assets is not particularly evaluated within an overall portfolio context.

An ad hoc approach would be a less formal approach based on the investment professional’s interview with investors. As opposed to precise categories, broad classifications are easy to derive. The more subjective the assessment, the more difficult it is to standardize.

The ability to take risk means the ability of the portfolio to sustain losses without putting the client’s goals in jeopardy; how much volatility the portfolio can withstand and still meet the client’s required expenditures. Generally, the client has an increased ability to take risk, if expenditures are small relative to the client’s portfolio.

The client’s willingness to take risk is subjective and determined through an analysis of the client’s psychological profile. There is no hard-and-fast rule for judging willingness to tolerate risk, so you have to look for statements or evidence in the client’s actions. Willingness to bear risk is determined by statements the client makes or by actions or by life experience.

The Monte Carlo method is a mathematical model often been used in investment for risk assessment. The Monte Carlo simulation can be used to help plan for retirement to project the likelihood of achieving financial or retirement goals, and whether a retiree will have enough income given a wide range of possible outcomes in the markets.

Monte Carlo simulation is very flexible. The advantages of the Monte Carlo simulation include the following:

– It considers path dependency.
– It can more clearly display tradeoffs of risk and return.
– Properly modeled tax analysis, which considers the actual tax rates of the investor as well as tax location of the assets (held in taxable or tax-deferred locations), can be assessed.
– A clearer understanding of short-term and long-term risk can be gained.
– It is superior in assessing multi-period effects.
– Points along the timeline can be considered to answer questions, such as, “Do savings need to be increased?” “Can I retire earlier?” “Must I retire later?”

Like any complex model, it is only as good as the inputs. Poor or simplistic inputs or modeling can create poor results. The disadvantages of Monte Carlo simulation include the following:

– Simplistic use of historical data, such as expected returns, for the inputs. Returns change and have a major effect on projected future values of the portfolio.
– Models that simulate the return of asset classes but not the actual assets held.
– Tax modeling that is simplistic and not tailored to the investor’s situation.

The period when an individual is working and planning and ultimately building up the value of their investment through savings is referred to as the accumulation phase. The length of the accumulation phase will vary based on when an individual begins saving and when the person plans to retire.

In the foundation phase, individuals are seeking to accumulate wealth through a job and savings, seeking education, or building a business. An inverse relationship exists between age and risk tolerance. Younger investors (foundation phase) typically have a higher ability to take risk.

The problems associated with estimating an individual’s human capital and total liabilities include the following:

– Determining the values of future net employment income.
– Determining required future outlays.
– Determining the individual’s lifetime.

Mortality tables show an individual’s expected remaining years based upon attaining a given age. A mortality table, also known as a life table or actuarial table, shows the rate of deaths occurring in a defined population during a selected time interval, or survival rates from birth to death.

Trusts are a means by which a grantor (or settlor) can transfer assets to beneficiaries outside of the probate process. A trust is a three-party fiduciary relationship in which the first party, the trustor or settlor, transfers property upon the second party for the benefit of the third party, the beneficiary. A trust can also be defined as a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.

A trustee has possession of and manages the assets for the benefit of the settlor and/or beneficiaries. The trustee may be considered the owner of the assets for tax purposes only.

Depending on the structure of the trust, the legal owner and the owner for tax purposes may be two different entities. Ownership for tax purposes may reside with the settlor or the trustee, while legal ownership of the assets may be held by the settlor or transferred to the trustee or beneficiaries.

A revocable trust is a trust whereby the settlor reverses the trust and resumes ownership of the assets. During the life of the trust, income earned is distributed to the grantor, and only after death does property transfer to the beneficiaries. The settlor is considered the legal owner of the assets for tax and reporting purposes and creditors, divorcing spouses can make claims against the trust assets.

In an irrevocable trust, the settlor relinquishes ownership and control of the trust. Irrevocable trust is a trust that cannot be modified or terminated without the permission of the beneficiary. The trustee is considered the owner of the assets for tax purposes and is responsible for reporting and paying taxes on income generated by the trust.

In a fixed trust, the pattern of distributions to the beneficiaries is predetermined by the settlor and incorporated into the trust documents. For example, when setting up a trust for a minor, the settlor may wish the trustee to distribute a portion of the assets when the minor reaches 21 years of age and then distribute a given percentage each year until they are exhausted.

A discretionary trust is a trust in which the number of shares of each beneficiary is not fixed by the settlor in the trust deed but at the discretion of the trustees. The primary concern is that the assets are distributed to produce the greatest benefit to the beneficiary or beneficiaries. Beneficiaries have no legal right to either the income or the assets of the discretionary trust. Thus, the trust assets are protected from claims against the beneficiaries.

A spendthrift trust is used to transfer assets to a beneficiary who is too young or is otherwise unable to manage the assets. A spendthrift trust is a trust that is created for the benefit of a person (often unable to control his spending) that gives an independent trustee full authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary.