Wealth management is much more than investment
Investment is only a piece in the “puzzle”
The terms “wealth management” or “financial planning” are seen as synonymous with investment advice and investments by most people. This is not surprising given that much of the financial planning industry also thinks this way: the primary reason why the major financial institutions employ financial advisers is to sell their investment (and insurance) products.
But, in our view, wealth management should be much more than giving investment advice and promoting investment products. Its purpose should be to help you maximise the chances that you achieve your desired financial future.
Putting the investment odds in your favour
Managing investment uncertainty
Whether we like it or not, there’s a lot uncertainty involved in predicting the future. Despite the increasing availability of information, our ability to predict has not improved. This means that we have to learn to live with an element of chance when it comes to managing our investments.
You can manage this element of chance by managing the level of investment risk you hold. An appropriate strategy will consider a) how much risk is appropriate and b) how you will manage this risk exposure over time (or across varying market conditions).
In this article we look at another area of life where the need to manage elements of chance arises and make some comparisons on how we might apply this experience to investment management.
Baby boomers’ housing experience may not repeat
Baby boomers still borrowing to buy property
Over the six years to 2009-10 [1], baby boomers (those born between 1945 and 1964) continued to pour money into both owner occupied housing and other property. And they were happy to take on additional debt to do so.
The table below shows the change between 2003-04 and 2009-10 in the percentage of households, by age of reference person, where the homeowner has a mortgage.
Principles of successful wealth management
Do the “principles” still stack up?
When we started Wealth Foundations in late 2007, we had no idea just how troubled the world would become. At that time, we drew up what we regarded as twenty timeless principles for successful wealth management. They became the basis for our “Foundations” series.
It is interesting to revisit these “principles” four years later to see whether they still measure up or whether we built our foundations on shaky ground. Our assessment is that for those prepared to look beyond what’s happening now and are committed to building the financial future they want, the principles are as valid today as they were in 2007.
Our twenty principles of wealth management
Our twenty principles are restated below. Do they resonate with you?
Moneyball: a story of faith in an objective strategy
Evidence triumphs over anecdote
If you’ve seen the movie “Moneyball”, (or read the book by Michael Lewis), you may have picked up on some similarities between the issues faced in managing a major league baseball team and those faced in managing investment wealth.
If you’re not familiar with the movie/book, it tells the story of Billy Beane, a professional baseball manager of the Oakland A’s, a low tier baseball team in the US major league. To overcome the financial power of the top tier teams, he adopts an approach that focuses on buying the attributes that win games (rather than buying the specific players he thinks will win games).
Rather than replace a high profile, big hitter with another equally expensive big hitter, Beane looked for other ways to replace him. The team didn’t necessarily need another big hitter, they needed to replace the (statistical) attributes that they had lost (e.g. the average number of times he got on base per game). By looking at player selection in this way he gave himself the freedom to build a winning baseball team without the restrictions imposed by traditional methods.
Financial Independence: a worthwhile financial planning objective?
Clearly, financial independence isn’t important for everyone
“Financial independence” is achieved when you have sufficient net investment wealth to support your desired lifestyle indefinitely, without the need for earned income i.e. work is a choice, rather than a necessity. We have always regarded the achievement of financial independence as a financial planning objective that most would embrace.
However, separate conversations that I had last week with three mid-late fifty year old professionals (who aren’t currently Wealth Foundations’ clients) really made me think that perhaps we, and our clients, were living in an alternative universe. The three admitted that within the past six months they had each borrowed between one and two million dollars either to renovate their existing residence or partly finance the purchase of a new residence.
And, apparently, they felt reasonably comfortable doing so. Either their accountant and/or financial planner had assured them that they could service the debt. Or they took solace from the fact that many colleagues around their age were borrowing similar amounts for similar reasons.
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You can be better off paying capital gains tax!
Surely, it’s better to defer paying tax
It is not unusual for clients to have sizeable exposures to individual shares that they have held for long periods of time. We generally would encourage them to sell these holdings and invest the proceeds into highly diversified investments to reduce the risk of their portfolios, without a loss of expected return.
However, we often experience considerable resistance to this advice if sale of the shares would result in the crystallisation of significant capital gains and the obligation to pay capital gains tax. Clients reasonably ask “What’s the point of taking an unnecessary action that brings forward the payment of tax?”
The Allure of Gold
Gold as a safe haven
The allure of Gold, as a viable long term investment option, has shot to new heights in the past five years. While this is perhaps understandable given its status as a safe haven, should it be a fundamental component of an investment portfolio?
There is a lot of misunderstanding about gold, its role in the financial system and use within an investment portfolio. We aim to address some of these misunderstandings.
A Brief History of Gold
Gold first became a transferable form of money around 560 B.C. when gold coins (stamped with a seal) were used by merchants to simplify trade. The coins were valued according to their inherent gold content. In 1066, Great Britain developed the British pound (symbolising a pound of sterling silver) and other units of currency based on their inherent metal value. During this period, gold (and silver) represented the main means of exchange (i.e. money).
Is a 100% defensive portfolio low risk?
The real risk is running out of money
In turbulent and generally downbeat financial markets, like we have experienced since the end of 2007, there is natural tendency to become more cautious. To spend less, save more, pay-off debt and, particularly for those close to or in retirement, hold more investment wealth in defensive assets i.e. cash and fixed interest.
We may get a sense of comfort from knowing that the value of our investments cannot fall further and believe we have adopted a sensible, low risk investment strategy. And this is certainly true, if you think that investment risk is measured solely by the volatility of investment returns, pre inflation and tax.
But if the risk you are more concerned about is that you won’t be able to live the lifestyle you want or that your money might run out before you do, then high levels of defensiveness may be very risky.
Borrowing to buy property within Super: Buyer Beware!
Just because you can doesn’t mean your should
Borrowing to buy property within a Self Managed Super Fund (SMSF) has been promoted by many within the advice industry as an exclusive opportunity you should seriously consider. And, while there can be occasions where this strategy makes sense, as a general rule the fundamentals just don’t stack up.
Back in 2007, the Government opened the door for SMSFs to borrow. The change was driven by the popularity of investing in instalment warrants (such as Telstra’s T3 offer). These investments had an element of gearing which created some confusion under the no borrowing restrictions of the Superannuation Industry (Supervision) Act. To over come this, the Government decided to remove the borrowing restriction.
