With economic uncertainty, the Great Resignation and the ongoing effects of the pandemic, it’s critical more than ever before to make long-term financial stability and asset growth a priority. This article looks at how you can make the mindset shift to make asset and wealth-building a priority in order to thrive in 2022 and beyond.
The long-term benefits of a wealth accumulation plan are significant. According to KOSEC CEO Michael Kodari, it provides stability in times of personal financial emergency, security in retirement, and emotional wellbeing in everyday life. It also leaves something that can be passed on to your children.
This sense of financial empowerment and wellbeing is more important than ever to curb the uncertainty and instability of our economic and social environment. In fact, a recent APA survey revealed that 72 percent of Americans reported feeling stressed about money at least once in the prior month.
Alarmingly, the survey highlighted that nearly one-third of adults said they are so stressed about the pandemic that they struggle to make basic decisions. Even more, when it comes to the most significant source of stress, money came in at number two (61%), just under work (66%).
Money-building habits
Smart money management is the key to asset building. It takes discipline, and it takes time. So where do you start?
Building assets begins with the right mindset, the right attitude. Attitude is the architecture of habits, and our habits shape our destiny. So, an asset-building program begins with a habitual commitment to set aside some of our earnings regularly, putting that amount to work in the form of an investment.
The nature of investment
Once the decision to take control of your wealth management is made; the next decision is the nature of the investment. There are two aspects to this: the investment vehicle (or structure) and the asset class from which the investment is selected.
The simplest structure is to invest in one’s own name or in a public offer superannuation trust. Other structures that are beyond the scope of this article, include a Family Trust or a private company.
There are three main asset classes:
- Bonds, or debt securities
- Shares, or equity instruments
- Property, including property securities
A fourth asset class is ‘Other’, and includes exotic investments like fine art, paintings, rare coins and stamps, and vintage cars. Gold is also categorized in this way in the traditional investment literature. Derivatives, which are complex financial instruments, are also considered to be exotic investments. The main point to appreciate about these investments is that they do not produce income, are illiquid, and generally require specialist expertise to manage them.
Emerging investment trends
One interesting trend is ‘passive investing,’ which refers to taking a buy-and-hold position for the long-term. This can involve virtually any asset, including shares, bonds and property securities. This position can be readily and inexpensively established by investing in an Exchange Traded Fund (‘ETF‘). An ETF is a specific investment structure, comprising a basket of securities or similar assets that is traded on a securities exchange, similar to a share that is traded on a stock market. The ETF tracks a specific index, commodity, sector or virtually any asset that can be collectively held.
Another popular investment trend that has been around for a long time is an ‘actively and professionally managed fund’ that pools investors’ money, which is then used to take positions in public companies, commercial or retail property, infrastructure assets, fixed income securities or private equity investments. The concept is that a skilled, professional investment manager, dedicated to the role of identifying and actively managing a portfolio of assets on behalf of investors, can achieve a higher return than the market average.
An interesting investment trend that has gathered pace in recent years is known as a ‘Separately Managed Account (SMA)’. This is a portfolio of investments managed by a professional advisor that is customized to the specific requirements and investment objectives of an individual investor. SMAs provide direct ownership of investment securities and offer a higher degree of investor flexibility compared to a Managed Fund.
Anyone can invest
Anyone can commence an investment plan. You can start one at any point of your life. An investment plan can be established for a newborn child, an adolescent or a mature-aged adult. A person who is under the age of eighteen years is subject to specific taxation rulings. However, independent professional advice should be obtained before setting up investments on behalf of children.
The key to building wealth is to embrace investment and asset management as an opportunity to feel empowered – not fearful. Once you move away from the ‘uncertain’ and ‘fear’ factors, you can create powerful, sustainable, life-changing habits to strengthen your financial wellbeing for yourself and your family now, and for the future.
The dos and don’ts of smart investing:
- Return – a measure of relative investment performance that must only be considered in terms of the risk in generating that return.
- Risk – refers to the risk of default (that is, losing all or some of your capital) or volatility (the degree of variation or uncertainty in the value of an investment). Rational investors expect higher-risk assets to be higher-return assets.
- Investment term – the time horizon over which the investment is likely to be held to achieve the expected (or desired) investment return.
- Liquidity – a measure of how quickly an asset can be converted to cash without having to discount its price. Liquid investments include government bonds and shares in companies with a high-market capitalization. This includes most ASX 300 companies.
- Growth – the potential increase in value of an asset over a given time horizon. Growth assets can also decrease in value. Growth assets typically include property or infrastructure assets. Growth assets typically do not distribute income and instead re-invest any income in ongoing growth, in order to increase the asset’s value.
- Income – derived from either a realization of cash from an increase in an asset’s value or a distribution of cash earned by the asset. Income-producing assets typically do not appreciate in value. This is because earnings are not retained to enable growth but instead are distributed as income.
- Taxation – different investment assets and forms of income are taxed differently. Investment income may be tax-deferred (some property-based investments), tax paid (Investment Insurance Bonds), or be franked in the hands of a shareholder, up to the rate of company tax paid by the company in which the shares are held. Alternatively, investment income may be paid by way of a realized capital gain, in which case 50 percent of the gain is assessable income, where it is received by an individual. Some investments distribute a capital return, (say) by way of a share buy-back. In this circumstance, an investor essentially receives his/her money back, in which case this is not taxable income.
- Diversification – the fundamentally important principle of diversifying investment capital across a range of assets and asset classes on which returns are not correlated, so as to minimize risk.
- Inflation – a measure by which an investment or asset must either increase in value or distribute income to maintain its ‘real’ or inflation-adjusted value. Inflation is a measure of purchasing power. Assets that move in line with inflation are said to maintain their purchasing power. These assets include infrastructure assets like airports and tollways. Unless an asset value increases in line with inflation, it is said to lose purchasing power.
Michael Kodari, CEO of KOSEC - Kodari Securities
Michael Kodari is the Founder and CEO of Kodari Securities (KOSEC), a leading provider of investment services to a substantial and diversified client base, including corporations and ultra high net worth individuals. With over a decade of experience in funds management and stockbroking, Michael has worked with some of the world’s leading value investors and financial institutions. A philanthropist and a prominent expert in the stock market, CNBC Asia has referred to him as “the brightest 21st century entrepreneur in wealth management”.
About KOSEC
KOSEC – Kodari Securities is a leading provider of investment services to a substantial and diversified client base, including corporations and ultra high net worth individuals. Established in 2010, KOSEC exists to empower and equip investors with the best investment opportunities, knowledge, tools and resources, as well as providing the highest level of product/service offering to help them make better and more informed investment decisions.
Find out more at https://www.kosec.com.au/
