INVESTING

How to sustainably grow your wealth

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Middle and upper class South Africans are earning more than enough to afford comfortable lifestyles, but they need to come to terms with the trade-offs required to ensure that their lifestyles are sustainable well into a long retirement.

Andrew Bradley, chief executive officer at Old Mutual Wealth (OMW), says despite the burgeoning growth in this group of individuals’ private earnings, they are living beyond their cash flow means and are eroding the asset bases they have built up for retirement, due to reckless spending and the inability to accept a mind-set change.

In research conducted by the business, it was found that 70% of those earning up to R1-million in annual salaries were overextended with no investible assets, while 14% said they were living beyond their means and struggled to make ends meet.

A further 10% said they were not worried about saving for the future, 14% said they would like to invest but were not sure who to turn to for financial advice and 23% said they saw no benefit in being loyal to a particular investment house and therefore a long-term strategy.

“It is not about what they earn, but what they do with their money, that is critical” says Bradley. “High earning individuals must take responsibility and consider how much is enough to provide for their current as well as their future lifestyle needs. They must also understand the future impact of their current financial discipline - or lack thereof. An investment plan which takes all these aspects into account is the only way to accurately determine how the assets they accumulate can best be grown to take care of all these needs.”

He says there are five basic principles to adhere to in order to ensure reliable and sustainable capital growth. “Even when the temptation is there to shrug off a sound investment strategy in the face of a seemingly endless and prolific income stream, we should not forget the examples history made of so many wealthy people who ended their days in circumstances that could have been avoided if a more sober approach was adopted when the going was good.”

He says to build and sustain wealth, individuals should:

  • Focus on time in the market rather than timing the market: “It is important to continue investing through all market conditions, and particularly during market lows when share prices are undervalued and a lot cheaper, so that you gain more during market highs.”
  • Understand time horizons and risk: “Time horizons are a major influence on an investment approach. The longer your perspective and the longer you are prepared to invest, the more options you will have with greater returns without increasing your investment risk.”
  • Diversify portfolios: “When deciding where to invest, it is always better to cast your net widely. Do not have all your eggs in one basket. Also do not focus on the returns from the individual components of a diversified investment portfolio. Rather look at the performance of your portfolio as a whole.”
  • Keep investing over the long term: “Compounding returns are the most powerful force in investments. This happens when you get growth on your growth. This only occurs when you have been invested for a long period of time. Trying to make up for lost time will require a lot more allocated to your savings and can be dangerous if you chase unrealistic returns.”
  • Ensure investment strategies are customised for specific needs: “Each person is unique and their financial needs will depend on where they are and their personal future plans. A good investment strategy should take this into account. What might be good for one person is not necessarily good for the next.”

He says there is a lack of understanding about the difference between income and wealth, and that most high earners have no idea how much they should be saving in order to sustain their lifestyles into the future.

“In order to increase wealth, it is essential to be realistic about future returns. Not only do you need to start investing at an earlier age but you need to keep in mind that your investments need to continue to grow beyond retirement. The purchasing power of your wealth needs to remain intact and at the very least be able to match but preferably to beat inflation.”

He said many wealthy individuals did not draw a distinction between business, lifestyle, investment and surplus assets. Understanding the characteristics of each of these asset types is critical to ensuring your financial security. Business assets could be shares in a company which generate income and for non-shareholders, the income they derive from work.

Investment assets are the assets required to replace the cash flow generated by business assets, especially on retirement. It is essential to grow these continually over time. Lifestyle assets include a primary residence, holiday homes, cars and other items bought to enhance lifestyles. Bradley says that often debt is incurred to acquire more of these kinds of assets, which further erodes the funds left for investing.

“Surplus assets relate to the amount of money not required to fund lifestyle needs. These funds can be risked to increase investment assets, to invest for future generations or to give back through charities or philanthropic foundations,” says Bradley. Getting the balance right with the spread of these asset types will ensure the success or failure of an investment strategy.

 

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