Whilst this wealth management mistakes callout mainly deals with aspects aspect of investing, there are others that could be considered. More on them at another time. So, what are these wealth management mistakes that we caution against?
- ‘Savings’ hording
- Ignoring your investor risk aversion profile
- Not investing to specific timeframes
- Portfolio concentration – and
- Beneficiary awareness!
How are these mistakes?
‘Savings’ hording
Without a clear understanding of your true wealth position, it is common that excessive funds accumulate in Savings accounts. For some, this is a ‘rainy day’ precaution. For some, it is a lack of awareness that other assets need to be considered in the wealth management mix. (Amazingly, superannuation is one of those assets overlooked in this context.) And for others, the lack of understanding of how investing works leaves them unwilling to ‘risk’ their funds.
Characteristics of Savings accounts include that they do not grow in value other than by added deposits, and interest earned. However, their value is eroded by inflation (often at a higher rate than the interest earned), and taxation.
Ignoring your investor risk aversion profile
Investor risk profiles are assessed according to a series of measures. These include emotions regarding gains or losses on investments, financial literacy, and investment experience. The timeframe for a proposed investment strategy also needs to be considered in this assessment. Lacking understanding of your risk profile (and goals) it is likely that your investments will not be ‘fit for purpose’.
Not investing to specific timeframes
Having touched on this in the above topic, it is important to recognise that different risk profiles may be appropriate. For short-term goals (up to three years) a portfolio with low volatility would be appropriate: and investment losses would hurt. For medium-term goals (within a term from three up to nine years) some volatility and minor setbacks could be tolerated. This leaves us with the long-term goals (ten years and longer away). For these an investment portfolio can be a little more aggressive, and losses more able to be recovered from.
Of course, these are generalisations (much like are made by superannuation account trustees of default funds). Underlaying each of these is the investor’s personal risk aversion profile. Consider the ‘compare the pair’ ad for the Industry Super Funds for the moment. One person may enjoy good health, have few dependants whilst the other has concerns for unwell children and ageing parents. The one may be comfortable accepting a Growth investment portfolio, whilst the other would probably prefer a more Balanced profile. The above time constraining considerations then need to further modify the construction of the respective investment portfolios.
Portfolio concentration
The two extremes of the portfolio concentration mistakes in wealth management are, absence of diversification, and over-diversification. An absence of diversification occurs when the investment portfolio is made up of assets of the one type. This can be in a single company, a single industry, or a single category of asset (Australian-only for example). This is commonly known as ‘having all your eggs in one basket’. That exposes the portfolio to the economic fundamental problem: when an economic event occurs, the entire portfolio will be impacted.
The other extreme, over-diversification, dilutes the benefit and effect of strategic diversification that lies somewhere between these two extremes.
Beneficiary awareness
Within your wealth management structure you will likely have superannuation, and you may have insurance outside of that regime. On each of these ‘products’ you are able to nominate beneficiaries in ways that ensure that the death benefits bypass your Will. For other non-superannuation investment assets, title to the assets need to be considered. Your goals and intentions to achieve a similar outcome may be possible in this way.
What solutions are available?
‘Savings’ hording
As this is often associated with avoidable causes, we suggest that they be directly addressed – and rationalised. If the problem is trying to cover a ‘rainy day’, an amount should be determined that would cover most exigencies. For instance, have sufficient cash accessible to meet six months of fixed/ unavoidable costs. Increased medical cost gaps may need to be provisioned in this calculation. Where your Cash accumulation is from uncertainty of your wealth position, a detailed itemisation should be prepared. With this list in hand, you will be able to analyse your need for wealth management skills and/ or advice.
The hording resulting from a lack of financial literacy could be resolved with some research and relevant courses of study. If time is of the essence, consulting an experienced, licensed financial planner will kick start that process for you.
Investor risk profile ignorance
Apart from trying to undertake a risk assessment of yourself, a proven course will be to consult a financial planner. They will guide you through a risk aversion assessment, explaining the significance of each aspect of the assessment. There are a number of psychometric tools available to undertake an investor risk profile analysis. We recommend that the guidance of an experienced financial planner will be most effective in this task.
Investing to specific timeframes
Each of us will have a different personal investor risk profile. Each of us will have a range of financial goals with different timeframes. How successfully those goals are achieved, and how confident we are as investors in the process, will be heavily influenced by our commitment to SMART goals.1
Portfolio concentration
To avoid the extremes of portfolio concentration, assets from different classes need to be selected. Depending on the size of the portfolio, a range of assets within those classes chosen should also be considered. There are specialist statistical attributes to consider and these may have to be accessed through a licensed financial planner. Within the overall portfolio construction process, all of the above identified ‘investment’ mistakes can be managed through the diversification metric.
Beneficiary awareness
There are two issues identified above that can be managed effectively through nomination of beneficiaries and/ or investment ownership structure. They are estate distribution equalisation, and tax effect minimisation. These are subjects for experienced professionals in Estate Administration and in Taxation – and we strongly commend consultation with those.
How can we help?
The advice team at Continuum Financial Planners Pty Ltd consists of people with accounting and financial industry qualifications. Our team is qualified and ready to help you avoid wealth management mistakes with your finite resources. They also have decades of experience in wealth management advising. Their experience includes advising on –
- the formulation of SMART goals,
- investor risk profiling,
- portfolio construction,
- beneficiary nomination methodology, and
- estate planning and administration.
To benefit from our expertise, experience and skills, call our office for an appointment with one of the Team (on 07-34213456), or Book A Meeting directly.
1 SMART goals are those that can be described as Specific, Measurable, Attainable, Realistic, Time-constrained.
(This article was first published in July 2024. It may occasionally be refreshed/ updated.)
