Wealth creation is about more than simply improving the value of your business. While this is important, so too is diversification to accumulate wealth beyond your business. A sound and well-managed investment portfolio is the key to creating the lifestyle you want for you and your family.
A sound wealth creation strategy will:
- Take into account your personal and financial goals
- Entail a level of risk you are comfortable with
- Focus on preserving your capital
- Seek to protect your returns from being eroded by tax
All investment entails some element of risk. This may relate to inflation, market fluctuations, taxation, or your chosen timeframes, for example.
Put simply, risk is the difference between what you expect to receive as a return on your investment and what you actually receive. The greater return you require on your investment, the higher the risk.
Some risks can be managed, others cannot. One of the best safeguards against risk is diversification.
You’ve undoubtedly heard the old adage advising against putting all your eggs in one basket! Diversification is just that – it’s the practice of ensuring you do not put all your money into one type of investment.
Investment types perform differently under different market conditions. Because it is not possible to predict all market conditions, investing in more than one type of investment can significantly reduce your risk. You may, for instance, opt to invest in different asset classes, such as cash, fixed interest, property or shares. Breaking that down even further, you may also create more than one investment in each individual asset class. If managed funds are your preferred investment, you may choose more than one type of fund or even more than one investment manager.
Investment time frames
Every investor is unique and your investment goals will help determine the best time frames for you. Your age and personal circumstances will also have an impact on the time frames, whether they are short (one to three years), medium (three to five years) or longer-term (five years and more).
Over time, investment markets move up and down. Generally, longer-term investments have greater capacity to ride out those fluctuations and market volatilities. However, you may be seeking a faster return, in which case you may opt for a shorter-term investment.
Short-term does not necessarily equate to high risk. More secure assets, such as cash and fixed-interest investments, can provide relatively fast returns on your initial outlay.
The ‘liquidity’ of an asset indicates how quickly that asset can be sold and converted into cash. This indication of how quickly an investment can be exited to access your money can be an important factor for many people.
One simple example is a real estate investment. Depending on the state of the market and other influencing factors (e.g. the state of the property, its location, etc.), it may be difficult to sell a property for quick access to cash.
It’s important to ask your fund manager how liquid your investments are, particularly if you are likely to need ready access to your cash.
Your wealth creation checklist
- Have a plan!
- Diversify your investments to minimise risk
- Start early – the earlier, the better
- Invest in growth assets to build your wealth
- Longer-term investments can help your ride out market fluctuations and volatility