How to Visualize your Personal Balance Sheet


The cruise ship left New York heading for Bermuda. A terrible storm has blown up. The seasick passengers are in their staterooms vomiting. "Is there anything that can be done to get out of these waves," they ask? "Nothing," says the captain. "We just have to drive through until we get to the other side."

And so with US stocks this year. The S&P 500 peaked with a gain of 9% YTD on April 29th, plunged 12% through August 5th, rallied back to breakeven on the year, slumped again through October 3rd down 11.3% and is now down 2.46% on the year. The quarter that just ended was the worst since Q4 2008 - the last great financial crisis. Markets are three times more volatile compared to the first half of the year, though half as volatile as the September 2008-March 2009 timeframe. The issue weighing on US stocks is the uncertainty of macro events in Europe. On a valuation basis:

  • S&P 500 earnings will set a new record this quarter
  • The trailing P/E ratio on the S&P 500 is now 12.4, a favorable ratio seen previously only a few times in the last 50 years
  • Treasury bond yields are at the lowest levels since the 1950's

Add that all together and we conclude that stocks are at the cheapest valuations in 50 years. We thought US stocks would close out 2011 with a gain of at least 8%. On a valuation basis stocks should be 15-25% higher. However, investors don't care until the situation in Greece is resolved, and that won't be until the New Year at the earliest.

So rather than obsess about the waves rolling the ship, we need to ensure that our "passengers" stay focused on the final destination. Of course we can deliver a 50 page financial plan, but sometime a simple picture is worth a 1000 words. Thus we present:

How to Visualize your Personal Balance Sheet

When we sit down with a new client, we spend a lot of time asking about all sources of wealth, not just the investable assets we will ultimately be responsible for: These sources of wealth can be divided into 4 broad categories:

  1. Net present value of income from employment, which we define as the lesser of the # of years to retirement or 10X current income (yes, a simplifying estimate given that income changes as one's career progresses, and would be lower if interest rates moved up substantially.)
  2. Value of "unconstrained" assets, which includes cash in checking and savings accounts, taxable investment accounts, minus short term debt such as credit cards and car loans.
  3. Value of "constrained" assets, which includes retirement accounts such as 401K's and IRA's, investments in hedge funds and private partnerships, and ownership of restricted stock. These assets are "constrained" in that liquidity can be obtained only with penalties.
  4. Illiquid assets, which include the equity (current value minus mortgage balance) in real estate, the value of jewelry, art and collectibles, and also equity in a private business. A "quick & dirty" estimate of a home's value can be obtained from The value of a private business varies wildly by industry. However a "quick and dirty" estimate might be 2-3X revenues or 8-10X profits.

We punch the values into a simple spreadsheet, and the resulting pie chart quickly diagnoses problems in the client's financial strategy. The chart of a recent college grad might be entirely comprised of NPV employment income. The larger the percentage of income and unconstrained assets, the more choices a family has.

More importantly, while the value of investment assets can fluctuate wildly, that effect is muted in the context of the overall balance sheet.

As advisors, we need to keep our clients "in the game." Americans have been net sellers of stocks and stock mutual funds for about 5 years now. At that rate, the average American will never be able to retire. It's a tough argument to make that stocks are a good value today, when plainly they could be a better value tomorrow. In the past, we have not been diligent in repeating this exercise with every annual review because frankly our clients are busy and don't necessarily have the time to update all the data we need. We will be more demanding about this going forward, so that we can help our clients let their intellect, and not their emotions, drive investment decisions.


Greece, Italy, Spain and all of Europe weigh on investors' minds. Yet stocks are at 50 years lows in terms of valuations. We are, of course, not selling. Between now and year end, we will be rebalancing portfolios and taking tax losses where applicable.