Investment and Wealth Creation l – Summary Dec 2011
“Prediction is difficult especially about the future..” – Niels Bohr
“There is no free lunch.”- Yogi Berra
Summary
These thoughts have been prepared in note form to provide a basis for discussion for CEOs, senior executives and those who own their own business. Each individual should review their own circumstances and seek their own advice before taking action. The focus of this presentation is for those who are planning for long term investment. It is not for those with an interest in trading or leveraged short term and opportunistic deals. Speculation is not investment
The Golden Rules
The investment markets in the long term ‘revert to the mean’ and follow long term economic trends. In the short term there are major swings with market prices overshooting trends and on occasion creating bubbles. The trends or cycles are predictable but not usually with foresight on timing ! Business cycles and recession occur in Australia and the USA approximately each 8 or 9 years. Investment cycles in financial markets are similar and mostly run for longer periods. During the last 100 years there have been 7 secular bull markets and 7 secular bear markets each lasting some 15 to 17 years. The average long term earnings growth for companies is approximately equivalent to long term GDP growth. The power of compound interest. Get started early in life with investment of even modest levels of regular saving. Most developed economies have grown at between 3% to 4% pa long term over the last 50 years. An investment in equities held for the long term with dividends reinvested has grown at between 10% and 11% over the same period. In real terms after inflation that is a growth rate of 7% to 8% pa. The compounding effect with this rate of nominal return increases an investment of $100k within 7 years to $200k and within 17 years to $50k. The best investment most business owners make is in their own company, either starting as an entrepreneur or growing or acquiring an existing business. It makes sense to have a balanced investment portfolio in other assets outside of your own business. There are cycles in the value of most major asset classes. A balance can be achieved with diversity between the classic choices of bonds or fixed interest, equities, investment property and alternate hedge strategies. The personal home has been for many a long term creation of personal wealth but it is generally a forced savings plan paying off a mortgage. There are often more efficient ways to grow assets than over invest in the personal home, even with the current tax free component of realized capital gains Business / Investment Portfolio / Personal use assets.
- Business – as owner / part owner / proprietor for the long term, target returns 25% ROI.
- Portfolio – Financial and Property investments, target returns 5% to 10 % per annum
- Personal – Home, Cars, Boats, toys, target returns NIL… most are reducing assets except in times of significant inflation.. Keep these personal assets separate from Business and port
Financial Planners and Investment Managers. Most Business owners and CEOs are busy with their work and their private lives. It makes sense to use professional advisors to “structure” and “recommend” investments. The fee for service should be more than covered with increased and more effective investment and performance. Don’t rely on them for advice as they mostly will not be there for as long as you are and have their own business to build….
Other Considerations
Business structures for wealth creation
Business owners should separate their Business structure from their portfolio investments and personal assets. Resist providing bankers with security over non business assets such as investment trusts and personal homes.
Most family business owners can take advantage of Discretionary Trusts and Superannuation Plans for their investments.
All business owners and CEO’s should have proper insurance and estate planning in place. This will need appropriate advise and implementation.
Understand The Plan and Review regularly
Prepare a financial and wealth plan and write it down. Review the plan regularly with yourself first, and with your family and other advisors.Blogger
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