When I speak to clients, two of the fundamental questions I ask are: ‘What’s your attitude to risk?’ and ‘What are your goals for retirement?’
Building an investment portfolio that is tailored perfectly to the client and can be adapted easily as they move through each life stage is vital for ensuring the best financial outcome. A harder question to answer is: ‘When should I move from wealth creation to wealth preservation?’
What is wealth creation?
Wealth creation is the steady accumulation of income and assets over time. Growing wealth requires you to identify your financial and life goals and these should cover the short term (1-5 years), medium term (5-10 years) and long term (10+ years). Goals may include property ownership, funding private school or university education, saving for retirement. Having a clear prioritisation of your goals will help inform your wealth creation strategy.
Next, you need to plan – make a budget for your monthly expenses and include your savings and investments in the budget. Wealth accumulation for the medium to long term requires investing beyond basic bank savings accounts. This means you need to understand your attitude to risk so you can develop wealth creation strategies that align to your risk appetite as well as your goals.
Finally, successful wealth creation comes from correct asset allocation. This is all about where you place your investments – bonds, equities, real estate etc. For example, common wisdom is that you should only invest in equities if you can invest for the medium term at least five years. This is so you can afford to stay in when the market is going through any period of volatility. It’s advisable to have the help of a professional wealth manager to thoroughly assess all the options to find the best combination of investments for you.
What is wealth preservation?
Wealth preservation is the maintenance of your income and assets. This can be challenging as many people tend to be passive about wealth preservation. It can be difficult to preserve your wealth when markets are volatile. As you move towards retirement, most clients’ attitude to risk alters. Having high risk investments in later life puts you at risk of losing some or all your accumulated wealth, leaving you struggling through retirement. Diversifying your portfolio allows you to continue to secure good growth whilst taking a conservative approach to risk that ensures you maintain your wealth. Asset allocation should be regularly reviewed as the client ages and their personal circumstances change.
In addition to changing your investment strategy, having insurance and an emergency ‘rainy day’ …….