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| Wealth
Management Strategies: A Question of Generation |
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| In today’s
society, it is not unusual to hear of younger generations destroying inherited
wealth that took several generations to build. With the variety of
investments available for investors today, however, is it really that difficult
to preserve wealth? There are currently over 5,500 offshore funds
to choose from. In fact, the choices available to international investors
are virtually limitless. The difficult question is what investments
are the right mix for the investor - be it mutual funds, stocks, bonds,
derivatives, real estate or some other investment. |
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| Health creation strategy |
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| If the investment
objective of an individual is to create wealth, the portfolio mix should
be more aggressive in nature. This first generation strategy would
be similar to that followed by investors under the age of 40 who are in
their most productive years. Typically, the strategy would involve
taking on more risk for an equally higher return. A sample portfolio
might resemble the following: |
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15%
US Large Cap Equity
35% US Small
Cap Equity
40% International
Equity
10% International
Bonds |
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| Annualized
returns for this group normally range from 12% to infinity. A word
of caution though, only go for the very high returns if you can stomach
the sometimes wide ups and downs of the investment. |
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| At
this stage in the investment process, it is important to get professional
investment advice. With the strategies of a good asset, investment
or money manager, the investor’s dollars will start to work early during
the savings period. The time-tested tool called “word of mouth” still
seems to be “King of the hill” when trying to find a good investment manager.
However, as we approach a new millennium, look for technology to play an
increasing role in assisting investors with this selection. The Internet
is already giving magazines and trade newspapers a run for their money
when it comes to highlighting the top money managers. Investors should
examine the five and ten year history of the investment manager and check
for things like investment performance to determine whether the assets
under management are rising. |
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| Wealth
transfer strategy |
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| Upon the creation
of wealth, it is often necessary to develop a strategy to transfer that
wealth to the next generation. In an offshore context, this can be
facilitated with a simple International Business Company (IBC). It
is, however, recommended that the IBC have an attached trust, to ease the
transfer of the IBC assets to the second generation. |
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| At the wealth
transfer stage, the investment strategy would resemble that of an
investor in the 40-55 year age group. What does this mean?
Basically, the strategy requires that investments concentrate on reducing
risk relative to that undertaken to create the wealth, while still seeking
an annualized return between 10% and 15%; in short, a balanced or conservative
growth portfolio. This type of portfolio might be distributed as
follows: |
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15% US Large
Cap Equity
15% Small
Cap Equity
20% International
Equity
20% US Bonds
15% International
Bonds
15% Money
Markets |
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| Mutual funds
are a good choice at this stage. The advantages are clear: professional
asset management and diversification. The diversification of risk
may focus on such areas as currency, investment sectors, investment products
and region or country. There are many offshore mutual funds in the
balanced and growth categories that reduce the risk of a wealth creation
strategy, while still offering stable returns. To further manage
risk, most investment professionals will advise their clients to keep at
least 30% of their investments in a hedge fund. |
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| t is also
important for second and third generation investors to keep in mind the
hard work and dedication sacrificed in order to build the wealth.
This practical check of constant reflection may go a long way to ensuring
an awareness of the importance of investment decisions. |
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| Wealth
preservation strategy |
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| It is the
preservation of wealth in the third generation that can sometimes create
the greatest challenge. Preserving wealth can be difficult for the
simple reason that those making the decisions in this era did not have
to make the sacrifices necessary to create the wealth. For many,
the money was always there and, as far as they are concerned, it will always
be there. Unfortunately, this is not always true. |
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| It is crucial
that all investments at this stage have minimal risk, seeking a return
of between 8-14%. The investments at this stage should be similar
to the investments of an individual in the 55+ age group. |
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| This would
favor an investment policy geared towards income generation, while making
a return well above the inflation rate. |
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| A model portfolio
might have the following distribution: |
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20% US Large
Cap Equity
10% International
Equity
25% US Bonds
25% International
Bonds
20% Money
Markets |
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| Conclusion |
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| A tip for
the wise: Focus on mutual funds in the second and third generations to
further diversify risk and asset allocation. Remember as well to
include a hedge fund that typically performs very well when traditional
stocks take a beating. |
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| In addition,
the costs of hiring a professional asset manager via a mutual fund can
be much less than if you tried to do the same thing as an individual investor.
It all goes back to the benefits of “economies of scale”. These strategies
will ensure that the cycle of create, transfer, and loss will be converted
into a positive cycle of create, transfer and preserve. |
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