• Strategy Foundation

    Use the process outlined here to get a starting point for designing your strategy and structure. A lot of first time investors don't do enough homework, particularly if they are not using a professional adviser. The steps outlined here while not comprehensive, do provide a good framework for the process.

    Founding Capital

    The starting point for any strategy must be either investment capital, an income stream to fund contributions, an existing asset or a combination of these elements. Consider whether your strategy intends to add capital to the investment over time or simply make a one time acquisition and how your over all capital and cash flow from income sources will be impacted. Founding capital can of course be borrowed however this adds additional risks and costs to the strategy.

    Manage Risk

    Before investing, take some time to consider your personal tolerance towards market risk and in particular compare any identifiable risks of the investments you are considering. Also look to identify any future risks that may arise due to legislative or other changes.

    Aside from the direct risks of the investment itself, it is also vital to look at personal risks.

     

    Managing the various personal risks associated with your financial structure is a complex and important task. We advocate seeking professional advice to ensure this area is covered properly as for most people, the complexities involved are beyond their scope of knowledge.

     

    The risks may be numerous but in terms of personal risk, the focus should be on future affordability, and unforseen events such as an illness or accident affecting earnings. Accurate forward cash flow planning and implementing appropriate personal insurance levels will go a long way towards protecting the strategy.

    Examine Cash Flow

    Cash is king and it is no different when it comes to investing. Consider any costs of the investment against expected income return (if there is no income return the Australian Tax Office will not consider the asset an investment asset). Look at an annual view of the expected cash flow in and out and factor in tax deductions (if applicable) to understand the overall annual cash flow position.

     

    For any gearing (borrowing) strategy annual cash flow calculations are complicated by the tax position, a myriad of associated cost & depreciation deductions often apply and we strongly advocate seeking professional help with properly understanding cash flow implications of any investment decision.

  • Debt Structure

    Debt structure has an enormous impact on financial outcomes yet many people continue to use inefficient debt structures in their planning and never address this area pro-actively.

     

    Smart wealth accumulators understand that debt can hinder or aid your financial progress substantially and are consistently focussed on reducing non-deductible (personal) debt. However they also understand they need to use deductible (investment) debt effectively to hold more assets and generate tax efficient passive income streams.

     

    Depending on the structure investment income and additional tax savings may in turn be used to reduce non-deductible debt further.

    Asset Management

    All assets need management of some description, some far more than others. One of the issues with self management of your own assets is that as you diversify and accumulate wealth in various investment vehicles the ongoing requirements for administration, management, decision making and reporting can quickly become overwhelming.

     

    A desire to self manage any asset MUST be weighed up against the required commitment and whether the individual realistically has the skills and depth of understanding to do so properly and without making a major mistake.

     

    For the vast majority of people, the wisest path is to focus on what they do best (earning the income needed to plant the seeds of wealth) and enlist the help of as much expertise as possible in their wealth planning & management.

     

    To take an example, imagine a retiree who desires to invest $1M in assets spread across domestic and international markets in property, shares, fixed interest trusts, bonds, term deposits, agriculture and commodities.

    This portfolio mix would typically have over 500 different assets involved with all their own requirements for ongoing management, decision making, accounting and reporting. The only way to realistically set up this portfolio and manage it ongoing is using fund managers.

     

    Self-directed investing has it's place and is fantastic for pursuing a niche strategy. However, considering the bigger wealth building picture take note that the wealthiest segment in our society prefer to use various investment managers for the majority of their holdings as they understand that this is the only way to achieve true financial freedom.

     

     

     

     

     

    Review Performance

    As a portfolio grows and potentially includes multiple assets in different classes and under various managers, it is important to review the performance and understand if the investment is fulfilling our expectations.

     

    In any cyclic market there are sure to be short term anomalies where growth has been above or below expectation for a period, however it is the long term that counts. For most asset classes, over any rolling 5 year period we would expect the average return of the investment to meet expectations.

     

    When reviewing any portfolio, re-balancing is a strategic adjustment worth considering. Using this approach will tend to de-weight the stronger performers in the portfolio and re-weight those funds from the profit in to the weaker performers. Why would we want to do this? Given that markets are cyclic, this tends out of funds that are potentially overvalued and in to funds that are potentially undervalued.

     

    Re-balancing is a close cousin to the dollar cost averaging strategy in that it tends to average out acquisition costs for the portfolio.

    Where's The Exit?

    Depending on goals, in a long term portfolio accumulation strategy there is generally no need for major portfolio adjustments very often. Using quality fund managers is a great way to take the weight of decision making off your shoulders and allow them to make the call on when to exit investment positions.

     

    One share accumulation strategy we teach at IFE called 'Active Rotation Accumulation' is founded on consistently accumulating from a filtered universe of quality stocks (strategy variants can also use ETF's or managed funds) at favourable price levels and de-weighting part of the holdings (up to maximum of half of the holdings) when they meet profit and overbought criteria. Using IFE's 3 step analysis method ideal overbought and oversold zones can be clearly identified and repeatedly used to generate outsize returns.

     

    The beauty of this strategy is that it always retains a core portfolio and consistently generates income while still allowing for outsize growth returns to be generated by the skills and diligence of the investor following the strategy.

     

    One major consideration in deciding to exit any major asset or portfolio is potential for capital gains tax. There are many strategies for reducing any tax liability, for example: selling the asset in a low income year or pre-paying interest on another asset during the same tax year. We advocate seeking advice for details on these type of strategies.

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