This wealth management mistakes callout deals with aspects aspect of investing. We acknowledge that there are other wealth management issues to consider. 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 understanding of other assets that contribute to the wealth management mix. Superannuation is one of those assets to incorporate in the management plan. 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. Furthermore, their value erodes with –
- taxation on the income generated; and by
- inflation (often at a higher rate than the interest earned).
Ignoring your investor risk aversion profile
Financial planners utilise a series of measures to determine investor risk profiles. These include emotions regarding gains or losses on investments, financial literacy, and investment experience. The assessment also considers the proposed investment strategy timeframe. If you don’t understand your risk profile (and goals), you’re likely to choose investments that aren’t 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 to nine years), investors should tolerate some volatility and minor setbacks. This leaves us with the long-term goals (ten years and longer away). These investors can take a slightly more aggressive approach with their portfolio and more easily recover from losses.
Of course, these are generalisations. 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 investment portfolio comprising only one type of asset lacks diversification . 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’. An economic event will impact the entire portfolio, creating a fundamental economic problem for such a portfolio.
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. You need to consider the title to the assets for other non-superannuation investment assets. Your goals and intentions to achieve a similar outcome may be possible in this way.
What solutions are available?
‘Savings’ hording
As avoidable causes often lead to this, we suggest you address and rationalise them directly. If you’re trying to cover a ‘rainy day’, determine an amount that would cover most exigencies. For instance, have sufficient cash accessible to meet six months of fixed/ unavoidable costs. You may need to provision for increased medical cost gaps in this calculation. If uncertainty about your wealth position drives your cash accumulation, prepare a detailed itemisation. 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, arrange an an appointment with one of the Team, by –
- phoning our officeon 07-34213456, or
- at your convenience, use the linked Book A Meeting facility.
1 SMART goals are those that can be described as Specific, Measurable, Attainable, Realistic, Time-constrained.
(This article was first published in July 2024. We occasionally refresh/ update it, most recently in July 2025.)
