Principles of successful wealth management

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?

Click Here To Read More

Financial Independence: a worthwhile financial planning objective?

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.
Click Here To Read More

Dividend imputation and super funds: debunking the myth

Dividend imputation and super funds: debunking the mythA focus on imputation credits in super only adds to risk

Many investment advisers and accountants who provide advice to self managed super fund clients insist on investing in shares that pay fully franked dividends. We’re not sure why. Perhaps they believe in some magical additional benefit that dividend imputation credits offer super funds. It’s a pretty simplistic approach to investing which has little foundation when you delve a little deeper.

The downside of this lopsided strategy is to sacrifice prudential portfolio management in favour of tax strategy. Most dividend imputation funds have a modest skew towards “value” stocks and while this strategy may pay off (in times when value stocks, such as banks, outperform the broader market), it may just as likely under perform.

Click Here To Read More

Concentrated investments are bad bets

Concentrated investments are bad betsPutting all your eggs in one basket may make you wealthy …

Most people are attracted to the idea of becoming fabulously wealthy by being a substantial and early investor in the next Microsoft, Google or, the latest technology darling, Facebook. But they generally understand that the chances of selecting such “winners” are slim.

However, it is not widely understood that although a large holding in a single investment has the potential to make you much richer, it is far more likely that it will result in you being worse off than if you had adopted a more diversified investment strategy.
Click Here To Read More

Building your exposure to shares and property

Two approaches to building investment wealth …Building your exposure to shares and property

We see two common approaches to building investment wealth and, particularly, exposure to growth assets (i.e. shares and property) among couples in their thirties and early forties. These people have generally borrowed to purchase a residence, with all or most available cash being consumed by the mortgage and meeting the expenses of raising what may be a growing family.

The first approach we will call “conservative”, even though we don’t really think it is. It involves directing all savings, except perhaps superannuation contributions, to repayment of the mortgage. There is no deliberate increase in growth asset exposure until the mortgage has been cleared and surplus cash is available to buy shares or property, either directly or via managed funds. It is viewed as imprudent to invest in risky growth assets before all debt has been repaid.
Click Here To Read More

“Ace stock picker” claim warrants further investigation

Eight years of market outperformance seen as indicator of skill …“Ace stock picker” claim warrants further investigation

An article in “The Australian” of 20 October 2010, titled “Ace stock picker John Sevior the key to bid for Perpetual”, suggests that the proposal by private equity group KKR to purchase fund manager, Perpetual Limited, depends on retaining the services of veteran stock picker, John Sevior.

To illustrate Sevior’s importance to the Perpetual business, the article points out that since he was appointed head of Australian equities in September 2002, Perpetual’s flagship Wholesale Australian Share Fund had returned 12% a year (net of fees). This compares with the annual return for the well accepted market benchmark, the S&P/ASX 200 Accumulation Index, of 10.22% for the same period.

The article goes on to say:

“Industry observers said yesterday a 1.78 per cent outperformance a year for eight years was a creditable effort. This was especially so because the market was driven by growth stocks (the commodities boom) for much of that time, while Perpetual is a so-called value manager specialising in finding undervalued companies”.

So the conclusion appears to be that Sevior (and his team) must be highly skilled and adding significant value. But is this a valid conclusion?
Click Here To Read More

Is there a bond market “bubble”?

Investing in government bonds is attracting a lot of attention Is there a bond market “bubble”?

Herding or “running with the pack” is one of a number of well documented psychological biases that inhibit our ability to make rational investment decisions that are not in our objective long term interest. And so are “hindsight bias”, “prediction addiction” and “overconfidence”.

We may currently be seeing them all interact on a global scale in the fixed interest or bond markets. An article in “The New York Times” of 21 August 2010 reported that a “staggering” $33.12 billion had been withdrawn from domestic equity funds in the first seven months of 2010, with many investors now “choosing investments they deem safer, like bonds”.

“The Economist” of 19 August, 2010 observed that falling US bond yields had delivered “bumper returns to investors” and inflows of $191 billion to bond funds. The same article also noted that “Some go so far as to call the market a bond bubble”.

Click Here To Read More

The Mechanics of Managed Funds: Tips and Traps

Managed funds: a time tested financial innovationThe Mechanics of Managed Funds: Tips and Traps

Managed funds (or their U.S. mutual fund counterparts) are the primary vehicle for the majority of individuals’ investments in share and fixed interest markets and, to a lesser extent, property markets. By pooling the funds of many investors, they offer a number of potential benefits (compared with an individual investing directly in the relevant asset class).

These include:
* Diversification across a broad range of individual investments;
* Economies of scale and reduced transactions costs; and
* Access to professional fund managers.
Click Here To Read More

Are You A Speculator Or An Investor?

Are You A Speculator Or An Investor?The difference between speculation and investment

What are the key differences in behaviour that help define the distinction between speculators and investors? What do your behaviours say about you?

Speculation has been defined as the assumption of risk in anticipation of gain. Compared to investing, it tends to be associated with higher risks and achieving quicker and larger gains. It generally involves a “bottom up” approach that treats each risk as separate and distinct. It includes elements of stock selection, market timing and forecasting.
Click Here To Read More