When you know where your living expenses for the next year will come from, you are far more likely to think longer term when it comes to investing. It’s no surprise then, those with more financial security – and more money to play with – generally can ensure their wealth keeps on growing.
For Australia’s growing cohort of millionaires, the focus is often on establishing a core (cautious) income base to their portfolio which meets their spending needs. From this base, they then can seek opportunities for growth and capital preservation in the future. They have seen the results of being overexposed to one sector during a market shift as well as the effects of diversification across asset sectors, currencies and through multiple entities. As a result, these key points have become fundamental to their investment philosophy.
The Investment Trends 2013 High Net Worth Investor Report suggested that high net worth investors showed an increased interest in international equities and Australian direct listed shares in 2013, while cash and short term deposits were less popular. Many have been reducing exposure to Australian equities this year while market analysts cautioned the local market was running too hot as ‘mum and dad investors’ chased yield plays such as the top 20 stocks.
Self-directed but use advisors wisely
What is often mentioned by their advisors is that wealthier investors are often well informed on global events and ahead of the curve when it comes to looking at opportunities. Generally, they rely less on their financial advice team (including their accountant and financial planner) as investment and strategic advisors guiding them on which entity to use for planning and tax purposes, using them much more as sounding boards to bounce ideas off.
Ahead of the crowd
It is clear that a few years ago many wealthier investors considered the Aussie dollar was unsustainable in the longer term at $1.04-$1.10 to the US dollar. They had the financial strength and comfort to know they could buy international unhedged assets and currencies to take advantage of the eventual re-rating of the dollar.
Likewise, as they saw interest rates dropping they were locking into three to five-year term deposits rather than sticking to the six to 12-month rollover cycles that many smaller investors are locked into on an ongoing basis. This means many are still earning four per cent or more on those longer dated investments. And it’s prudent to diversify a portfolio into cash investments.
Most have considerable property portfolios spread across residential and commercial real estate and again they understood that lower interest rates would benefit a long term investor in property who could wait for those rates to flow through to asset prices. Often, via personal or business networks they get opportunities to invest in development projects delivering far beyond the basic property returns for those positioned to take on some additional risk.
Long term focus
Because of the focus on the longer term, they are also the biggest users of tax efficient vehicles like self-managed super funds (SMSFs) and family trusts. One of their primary objectives is to pass funds tax effectively on to the following generation or to provide themselves with a comfortable self-funded retirement.
They use debt wisely and understand the power of leverage and negative gearing on longer term investments, but this doesn’t mean they are shy about refinancing. This is especially true, if they can see that interest rates are at 40-year lows and that it may be time to lock in the fixed rates to plan for the next interest rate cycle change.
So I think it is clear that the main lesson to be gleaned from the portfolios of these ‘high net worth’ investors is to secure your income first and then tackle strategic long term investments as that is where the risk premium is available and profits are made. These are, of course, not set-and-forget investments and you must stay on top of global events to ensure you see the changes as they happen and avail of the opportunities while others are focusing elsewhere.
Author: Liam Shorte is a Financial Planner, SMSF Specialist Advisor and “The SMSF Coach”. As an SMSF Specialist Advisor™ with Verante Financial Planning, Liam provides a range of services to clients and professionals in the self-managed super fund space. He also provides strategy and guidance to subscribers to the Intelligent Investor – Super Advisor service. Liam works with a range of professionals including accountants, bookkeepers, other financial planners, solicitors, real estate agents, divorce counsellors and mortgage brokers to deliver best of breed strategies to their clients. Follow Liam on Twitter: @smsfcoach
Disclaimer: The views expressed, and any advice given, in the above article are those of the author, and do not necessarily reflect the views of RaboDirect. We recommend that you seek professional advice before making any decisions relating to the matters discussed in the article.