Core concept 1 - Portfolio and Wealth Management

Let's roll! I'll take things from the top for our core concept chapters. Today's focus is on two key terms which are often used (mistakenly) to mean the same thing. Before you make any financial decision, it's important to make a distinction between them. The following is not the only way of defining these terms, but I've found this approach quite helpful in the past.

What do people actually mean by "wealth management"? The way I look at wealth is to combine an individual's entire asset base. Not just financial assets (savings, retirement accounts, brokerage accounts etc). I add in cars, property, personal possessions - all the tangible stuff. The final piece is a bit controversial, but I think too many people ignore it - your own education, work experience and knowledge. I'll come back to this last point later on.

"Portfolio management" is generally used to describe how people manage financial assets, for example how much to put into equities in a 401k plan, and whether to use a fund run by Fidelity, Vanguard etc. It's a subset of wealth management.

Why do I add in things like work experience and education into the definition of "wealth"? Let's be clear here - all the fancy theories inside "portfolio management" don't run themselves. The way you look at information and act on it drives every decision you make, including how to manage money. Not appreciating that leads people into all sorts of trouble.

Unlike the talking heads you see on TV, I like to stick to a few simple rules. And the most important one of all (and the one that we all struggle with) is to understand our own biases. How we look at the world is based on our experiences (good and bad).

As an example, when I try a new trading strategy and I hit several home runs, I have a tendency to think "I'm really good at this". Sooner or later, a reckless decision stops me in my tracks. The trick I've learnt is not to get disheartened. I cut my losses, pause for a while and reflect on what actually happened. Total honesty can be painful, but it's the only way to learn. Then I pick myself up and try again!

You might ask "So what?". You need to have a picture of your overall wealth and how you plan to manage it. Diving straight into managing a portfolio of financial assets (stocks, bonds, options etc) is the way most people proceed - but I believe that's simply wrong. If you haven't got a full picture of your circumstances, how can you manage each "piece" properly. Or to put it in sports terms - a team of individuals (however well trained) can't win without an overall game plan.

In the next Core Concept, we'll take a look at how you build that game plan.