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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. Wealth creation strategy 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: 15% US Large
Cap Equity
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. 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. Wealth transfer strategy 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. 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: 15% US Large
Cap Equity
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. It 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. Wealth preservation strategy 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. 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. This would favor an investment policy geared towards income generation, while making a return well above the inflation rate. A model portfolio might have the following distribution: 20% US Large
Cap Equity
Conclusion 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. 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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