If investors had long-term plans at all, too many have thrown them out and are instead reacting to the latest global economic gloom, says Mr Jonathan Philpot, financial planning partner at HLB Mann Judd Sydney.
“While annual plans might be good for the household budget, and as a stepping-stone for longer lasting savings strategies, people must put some thought into long term planning, especially when there is so much short-term doom and gloom around.
“We notice many clients stood firm on their investment strategies following the global financial crisis in 2008 but continuing bad news and falling markets have eroded the resolution of all but the strongest.
“Every investor and saver should consider the start of 2012 as the beginning of a new cycle (whether it turns out to be or not) and develop a 10 year strategy to re-energise their savings and investment.
“A ten year strategy for building wealth helps maintain focus on achieving goals and means people are less susceptible to making changes to their investments based on current economic worry.
“All the bad news is short-term impact. Over the longer-term there is time to recover and investment returns will smooth out,” he said.
Mr Philpot said that the people should start by identifying their ten year financial goals, which will depend on their financial life stage.
“For instance, someone in their mid-thirties with young children may be focussed on insurance needs, school fees and mortgage repayments, while someone in their forties should be starting to think about wealth accumulation and building up their superannuation.
“Once the goals have been set, the process should then be how to achieve them, and there are four main steps – savings, investments, structure and protection,” Mr Philpot said.
“The first is creating a savings plan. The key to building wealth is the ability to save. First, review budgets and identify where savings are possible. As a general rule, being able to save 10 percent of a net salary (excluding super) is a good start, but it may not be sufficient for some to meet their goals.
“As part of this, develop some projections for the next 10 years of the savings and when the big expenses will pop up. The growth rate will be determined by asset allocation (see step 2), but over a few years the benefits of compounding become evident. Keep in mind, however, that it takes time to build wealth.
“The second step is to determine the asset allocation for investments. The key driver of investment returns is the mix between equity and fixed interest investments. Professional advice can help determine the correct asset allocation to suit individual circumstances. As a general rule, the longer the investment horizon, the more people can invest into the volatile investments, as in the end it is the additional volatility that provides the excess return.
“Thirdly, it’s important to choose the correct structure to invest in. For those approaching retirement, this may be superannuation, but those in their thirties may want to access this money much sooner so it may be better to invest personally or in a spouse’s name. If there are sufficient funds to invest and some tax advantages can be gained, family trust structure might be appropriate.
“This stage may also need a combination of plans, such as increasing superannuation contributions to build retirement wealth, repaying the mortgage to reduce the non-deductible debt and an investment plan in a non-working spouse name or geared savings. All these options need to be fully explored.
“Finally, it is important to have the right personal protection in place. This means having appropriate income protection, critical illness and life cover, and also estate planning arrangements and appropriate powers of attorney.
“Working through each of the above steps is the best way to ensure that the ten year goals can be reached,” Mr Philpot said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Jonathan Philpot – Phone: 02 9020 4196
30 January 2011