There is no doubt that managing wealth properly, so that it builds and lasts, is a discipline. What is perhaps less well appreciated is that it calls for a multi-disciplinary approach. This is why institutions employ specialists to cover the various parts of the piece, and why people typically call in the professionals once their wealth gets to a significant level, so that no strand is neglected.
There are, however, a number of precepts individuals can follow right from the start of their wealth journey to stand them in good stead. Keeping an eye on all of the following factors will build a strong foundation for your plan.
Needless to say, your first job is to protect your wealth.
At a basic level, this means only making deposits with institutions covered by the Financial Services Compensation Scheme (and spreading your money among several if the amount exceeds the £85,000 limit), while also being constantly vigilant against investment frauds. Countless investors have been caught out by the very plausible-looking cryptocurrency and FX scams which have proliferated during the pandemic.
The next key way to protect your wealth is to always ensure your cash holdings are of a sensible size. Rock-bottom interest rates and now inflation risk mean that being overly cash-heavy is very often self-defeating, rather than being “safe”. You need your wealth to grow at least with the pace of inflation, or time will powerfully erode its spending power away.
For most people, a well-diversified investment portfolio is the only way to build wealth long term, and with a healthy allocation to risk assets.
Growing your wealth has to be a highly strategic undertaking if it is to fulfil its potential. What to invest in and how are big questions here.
Asset allocation – the proportions of asset classes represented in your portfolio – largely drives the returns you will achieve. However, investors are now having to re-evaluate old wisdom such as the classic 60/40 equities to bonds rule and grapple with the new, such as the recommendation from growing numbers of experts that all wealthy investors should have a 10-20% allocation to alternatives as a matter of course.
The equity markets and sectors to invest in to secure appropriate diversification is another thorny issue, and one not necessarily completely solved just by buying a selection of funds. Beware concentration risk and replicating exposures; look under the bonnet of your fund investments and pay heed to market capitalisation in how indices are composed.
One of the biggest impediments to growing your wealth is the one most forgotten about, however, and that is the fees and costs you pay. Seemingly small differences compound to make a world of difference over time, so ensure your provider – and the way they invest – is as cost-efficient as possible. Your wealth manager should always be looking to trim investment costs and get exposure in the best possible way.
It’s tempting to think of tax planning and investment management as entirely separate disciplines, but the two are more closely entwined (or should be) than you might assume. Saving on tax wherever you can is at least as important as making healthy returns.
There are specific vehicles like Enterprise Investment Schemes and Venture Capital Trusts which can create powerful tax-efficiencies for those able to take on the additional risk of investing in early-stage companies. However, there are numerous tax fixes the professionals can look to implement for all investors too.
When to sell and crystallise gains is a key question, as are the form and structures in which investments are held. Never underestimate the importance of your ISA to shield gains from tax; higher earners who have exhausted their pension allowances are increasingly seeing ISAs as powerhouse alternative retirement savings route, for instance.
Wealth is of course highly personal, but efficient tax mitigation is invariably the product of managing it on a familial basis. By sharing allowances between couples, planning for transfer between the generations well ahead of time, and always taking tax as an important lens through which to see your wealth, your tax savings can vie with your investment returns in improving your eventual financial position.
Many disciplines; one aim
This just scratches the surface of the multiple disciplines that go into managing wealth effectively, but serves as a reminder of how many “hats” the savvy manager of wealth has to put on – and regularly at that. For every change in your strategy, consider exactly how that move will help you protect and grow your wealth, and what the impact on your tax position might be.
Most important of all, try to think about saving money as much as making money. Keep a keen eye on investment costs at all times and don’t hesitate to seek better value for money elsewhere. The first part of that equation is easily taken care of by our comparison tools, and so needn’t call for much dedication at all. As for changing providers to get a better deal, now that’s another discipline entirely. Here, I can only advise to let the numbers speak for themselves!
This piece is for informational purposes only, and is not intended in any way as financial planning or investment advice. Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
Always remember that investing involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.