Principles of Successful Wealth Management

Making smart wealth management decisions

You have aspirations for your future. But achieving those aspirations requires making numerous decisions, one at a time. Our view is that you are more likely to achieve your goals if those decisions are based on processes and principles that both science and experience suggest have the greatest chance of success i.e. they are "smart wealth management decisions".

The processes and principles derive from at least five disciplines, with some of their major findings and their implications discussed in our Foundations’ series:

  • Foundations of Financial Economics;
  • Foundations of Behavioural Science;
  • Foundations of Decision Making;
  • Foundations of Positive Psychology; and
  • Foundations of Solutions Based Coaching.

Summarised below are the key principles that underpin the advice that we give to our clients to help them make smart financial decisions about their financial future. We hope they also assist you to make better choices about your financial future.

1. Markets work – prices of investment assets incorporate all available information and can confidently be taken as "best guesses" of value. Don’t try to second-guess the market – benchmarks of asset class performance cannot be reliably beaten by stock picking or market timing. Any apparent outperformance reflects either luck and/or greater risk;

2. Risk and return are related – the level of risk you take will drive your investment returns. But if you need higher returns to achieve your financial objectives, do not just accept any type of increased risk. Take investment risk that has been reliably rewarded in the past and can be expected to be rewarded in the future. There are only five risks factors that meet these criteria;

3. Diversification is key – investment markets do not reward concentrated risk taking e.g. a share portfolio containing a dozen shares, a single investment property, an investment portfolio focused on a sector (e.g. resources) or country (e.g. Australia). Invest in broad based asset portfolios of every asset class where risk is rewarded over the long term in a strong and reliable manner;

4. Structure explains performance – Asset allocation (or risk exposure) is the primary driver of the returns of your investment portfolio. The most important investment decision you make is your allocation between defensive and growth assets. This depends on the interplay between your attitude to risk, your need for risk and your capacity for risk;

5. Learn to embrace uncertainty – rather than ignoring or avoiding the inevitable uncertainties that exist with managing your wealth, learn to accept and embrace uncertainty as a normal and ongoing reality of successful wealth management. It will make the journey more agreeable and rewarding;

6. Avoid focusing on the short term movements in your portfolio – over the long term, capitalism rewards risk-takers and share markets trend upwards. In the short term, however, markets move in a random fashion and randomness does not provide any useful feedback;

7. Look at the big picture – the broader the picture and the longer the time frame you incorporate into your wealth management decision making, the better decisions you are likely to make;

8. Avoid being over–confident – over–confidence is the cause of a high proportion of poor decisions, particularly when you think you know it all. A little humility and caution will improve your financial decision making;

9. Don’t look back – the best decisions are made with a forward looking attitude. Always aim to progress and avoid the unhelpful pressures that come with the thoughts of "what might have been–;

10. Learn to think independently of the crowd – following the crowd may be comfortable but is unlikely to help you achieve your objectives. Invest the time and effort to become clear about your lifelong objectives and take steps to move progressively towards their attainment (even if that means standing apart from the crowd);

11. Focus on what you can control – you can’t control outcomes, you can only influence or control inputs that drive those outcomes;

12. It’s about ends, not means – understand your primary objectives in making a decision and don’t be distracted by what may be secondary objectives or simply means to a desired end;

13. Value versus cost, investment versus expense – in making decisions, you should be looking for benefits that are in excess of outlays. The size of the outlay should be an input to rather than a determinant of a decision;

14. Information isn’t knowledge – don’t confuse information with knowledge (or, better still, wisdom) when making decisions. Too much of what masquerades as financial advice is simply information and may be counterproductive to making smart financial decisions;

15. Planning is a process not an event – effective planning is not a once off event. Circumstances change, requiring ongoing review of existing strategies against the backdrop of objectives that also may be changing over time;

16. Avoid complexity – solutions are often more complex than they need to be. When it comes to your personal wealth management, if you cannot understand a proposed solution it is unlikely to be in your best interests;

17. Money is a means to an end, not an end in itself – the pursuit of wealth and its trappings for their own sake are unlikely to result in increased life satisfaction;

18. Acknowledge and celebrate progress – regularly review your achievements and progress. Take time to acknowledge and celebrate how far you’ve come. If you treat financial and lifestyle "success" as something that only happens when you have achieved all of your goals, you may find it elusive;

19. Accept your current circumstances – you are more likely to take clear and purposeful action when you are in a state of acceptance than one of avoidance;

20. Implementation is critical – until a decision is acted upon it is only a good intention. Unless there is effective implementation, the best decision making and planning are a waste of time and effort.

If you wish to understand first hand how these principles can help you make smart decisions about your financial future, please contact us to arrange an obligation free introductory meeting on (02) 8249 5797.

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