Introduction
“Get rich quick” schemes have a poor reputation, as they should do, because building substantial wealth is a long-term endeavour. It is an eminently achievable one, however, although much depends on taking advice at the right time and putting robust savings and investment plans into practice as early as possible.
In short, building up wealth (and keeping hold of it into your old age to be able to pass it onto the next generation) depends on ensuring your money is always working as hard as it possibly can. You must maximise the returns your capital can generate, while not exposing it to undue risks. At the same time, you need to keep the taxes and costs that might powerfully erode your wealth to a minimum.
These are the central precepts of wealth management, but each needs a little more explanation to address potential blindsides.
#1 – work out your net worth
As we explain in more depth here, working out your net worth is a highly valuable exercise both at the beginning of your wealth journey and periodically as you review your situation. It will also help you to see if your insurance coverage is adequate.
Your net worth is simply all your assets (not including primary residence, but definitely any business interests) minus all your liabilities. Calculating your net worth might actually be slightly more complex than it first appears, however, and it is vital to carry out a thoroughgoing examination of all your financial affairs and your spouse’s perhaps. It is very easy to leave long-forgotten SIPPs and ISAs out of the equation, for example, or to underestimate how much more you need to build pension pots by.
#2 – Set your objectives
You need to be really clear on why you wish to build wealth and what all your objectives are for the short, medium and long term. Consider also breaking these down further into necessities (like pension planning or funding your children’s education) or nice-to-haves (like a holiday home) on a sliding scale.
You might like to build an “investment policy statement” to help create and maintain focus for your wealth plan. This will be particularly useful for DIY investors who can often find themselves falling prey to common investment mistakes or paying insufficient heed to changes in their profile. Investors taking professional wealth management advice will benefit from having an expert elicit all the necessary information and tweaking their plan as their situation requires.
#3 – Be realistic on risk
We often find that inexperienced investors profess themselves to be very risk-averse indeed, preferring to keep the bulk of their wealth in cash and property. Yet this is unlikely to provide the growth you need to achieve your goals. Returns are a reward to taking on risk and you are going to need to take on a reasonable level.
When cash isn’t generating returns in excess of inflation, your wealth is really being eroded away. In contrast, over the long term, equity investments consistently beat any other kind. They will never encourage you to be reckless, but helping you see the level of risk you can and should really be taking on is one the key areas where a professional wealth manager adds value.
#4 – Don’t get emotional
One of the main reasons to be clear on your investment strategy and realistic about risk is to stop emotions getting the better of you. A professional investment manager plays an invaluable role in stopping you make emotion-driven investment decisions should, say, the markets have a set-back. If you are investing on a DIY basis you will have to avoid this pitfall assiduously yourself by being aware of your biases.
It hardly needs to be said, but successful investing depends on buying low and selling high. All too often, emotions override logic to make investors do the precise opposite.
#5 – Don’t pay too much (in fees)
Top-line investment returns are only the start of the story since it is net gains you should really be focusing on. Management (and other) fees being too high will prove a real drag on your investment performance, so insist on understanding every charge being levied and compare providers on a regular basis to ensure you are getting best value.
You need a wealth manager which will achieve robust returns on your investments and also one where those returns are not eroded by fees that are too high. Pay attention to the Total Expense Ratio quoted by potential wealth managers, aiming for one of around 1.7% or lower.
#6 – Don’t pay too much (in taxes)
Tax is all too often overlooked by DIY investors, but will always be a focus for professional money managers. You must make sure that you are always using all available tax allowances (as a whole family) and make your investments in the most tax-efficient way possible.
There are numerous, completely legitimate ways to minimise the tax you pay through how you invest, whether you wish to address income, Capital Gains or Inheritance Tax (or all three). Tax rules change frequently which can create new opportunities, but this clearly also makes professional advice vital.
#7 – Boost your pension savings
Pension planning is particular challenge as we are living longer than ever while state support is falling away. Think about boosting your pension savings as early as possible to take advantage of employer contributions and government reliefs for as long as you can.
Tax relief on pension contributions can be really substantial: basic 20% tax relief on contributions means each £80 paid in is really worth £100. The higher rate of income tax applicable, the higher the relief, however. Higher or additional rate taxpayers can claim up to an additional 20-25% in addition to the basic rate.
#8 – Be a long-term investor
It is essential to remember that investing is very different to trading. Investing is about long-term wealth building rather than short term “bets”. Trying to “time the markets” or make a killing overnight is not the path to long-term wealth, or a comfortable investment journey.
Try to invest, and stay invested, on a longer-term view (at least five, but hopefully ten years or more). Also consider drip-feeding money into the markets, rather than swooping in in one go. That way your investment can ride out the ups and downs of the markets and you can avoid the worry of trying to time them too.
#9 – Diversify your investments
It may be tempting to put a greater part of your wealth into the “next big thing” in order to make outsized returns quickly. However, that course is fraught with dangers – not least that of having “all your eggs in one basket”.
Instead, you should have a diversified, balanced set of investments that might include property, cash, bonds, equities and possibly other asset classes like alternatives or tangible assets. A set spanning several geographies might be wiser still. That way your risk exposure is diversified and your assets are less likely to fall in value at the same time.
#10 – Plough profits back in
If you can afford to forego dividend income and choose to reinvest in more equities instead, this could make a stunning difference to your end wealth level. Reinvesting dividends essentially means your returns earn returns of their own, and this compounding effect is actually at the heart of any good long-term investment strategy.
Einstein called compounding “the eight wonder of the world”. It is little wonder, considering that its power means an ISA investor using their full allowance and earning only quite modest investment returns could become a millionaire in well under 30 years from these savings alone.
Summary
Put principals into practice
These are just a sample of the wealth-building principles investors should be building into their strategies. There are many more addressed in our Knowledge section that may be well be relevant to your financial situation and goals.
It is certainly not impossible to devise, implement and maintain a robust wealth management strategy yourself, but it is likely to be trickier than it is often portrayed, particularly when tax matters are added to the equation. The amount of expertise and energy required means that professional advice is often the preferred option for those without the time, experience or inclination to manage their own investments.
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