Wednesday, March 29, 2006

Financial Planning - When Conservatism Makes Sense

Financial Planning - When Conservatism Makes Sense

Hi! I just read an interesting piece on CNN about the number of US millionaires being on the march.

You'll find the full story here:

Report: Number of U.S. millionaires reaches record - Mar. 28, 2006

The bit I found most interesting was this paragraph:

"Over 50 percent of the millionaires surveyed said they had become more conservative in their investment approach over the past year. Their wealth is the result of long-term wealth accumulation."

This finding supports a view I've found myself evolving toward, particularly over the last year or so. You see, any well-structured financial plan must address three main components:

  1. Wealth Protection
  2. Wealth Accumulation
  3. Wealth Distribution

Like most people, I find point 2, wealth accumulation, the most exciting element of this mix.

Therefore, a large part of the education process I go through with my own financial planning and life planning clients involves teaching them the basics of the Risk-Reward Relationship. This essentially boils down to the reality that, in most cases, the more investment risk (meaning investment value volatility over time) you can stomach, the more investment reward you should (hopefully) be able to reap after a long period of patient watching and monitoring.

Based on temperament, I am inclined to prefer a long-term buy-and-hold strategy. Unfortunately, in my home market of Malaysia where the equity market experiences more rises and dips than a roller coaster, that strategy is often a recipe for disaster.

Frankly, the rising volatility of investment markets around the world means that a large chunk of wealth accumulation's benefits must be derived from intelligent asset allocation. So, when I sit down with my clients, I don't merely suggest they invest in equities. The roles of money market and bond funds must also be carefully explained to them.

As people grow richer - and this is borne out by that interesting CNN report - the more loath they are to lose what they have painstakingly accumulated over decades of sacrifice. This understandable - and justifiable - shift toward conservatism causes a reduction in the overall risk level of their portfolios.

Obviously, if everyone starts acting this way, it could spell disaster for equities in the long run.

With America's baby boomers now within striking distance of their retirement years, the world is bracing for precisely that sort of equities implosion to begin within the next half decade or so. Yet it is important to realise that not all investors are American. The rising wealth of China and India should release a fresh influx of eager, well-heeled players in global equities.

Bottomline: The other side of the capital market investing table is populated by the masses who still are willing to take equity risk in a bid to one day grow rich enough to justifiably switch their asset allocation to cash and fixed income instruments. The average person, among the elite minority who succeed financially, takes about 25 to 30 years to get to that point.

I have to get ready for a client meeting now, so I'd better go. If you have the time, do let me know what you think about this situation.

If you'd like to read more about financial planning, visit me here.

Take care.

Warmest regards,


Rajen

Rajen Devadason is CEO of RD Book Projects and its sister company RD WealthCreation Sdn Bhd. He lives in sunny, peaceful Malaysia with his gorgeous wife Rachel. He's a Malaysian Securities Commission-licensed financial planner, a life planning consultant, a professional speaker and a serial author... which probably explains why he's so exhausted! Some of his books are available here, and, if you're interested, here are some quotations he reckons are accurate, bold or cool.

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