Profiling - Wealth Management
Authors
1. Sources of Wealth
n Wealth created by Entrepreneurial Activity probably indicates:
Ø The “self-made” investor may have greater familiarity with risk-taking and
Ø a higher degree of confidence in his ability to recover from setback.
Ø They often have a strong sense of personal control over the risks that they assume. They can be very reluctant to cede (giveup) control to a third party or to accept investment volatility over which they have no influence.
n Wealth acquired through inheritance, one-time windfalls, or accumulated over long periods of secure employment may indicate:
Ø More passive recipients of wealth may associated with reduced willingness to assume risk.
Ø They are assumed to have less experience with risk-taking,
> Less understanding of what taking risk means, and
n Portfolio Size - In general, a positive correlation exists between the perception of portfolio size and the level of risk tolerance. If an investor perceives his portfolio to be small, by whatever measure, then a lower level of risk tolerance may be more appropriate.
n Young – Investors just starting out with young families or early in their careers are assumed to have more opportunities to recover from market downturns than older investors.
Ø They have longer investment time horizons with their years of greatest capital formation yet to come,
Ø Leading to higher than average willingness and ability to take risk.
Ø Their portfolios should reflect aggressive growth characteristics
n Mid-Career – Investors in mid-career still have a long time horizon.
Ø They can tolerate risk but their portfolio may become less aggressive and exhibit somewhat more conservative characteristics, especially as they approach retirement.
Ø Although still considered a long-term investor, the individual must now consider more seriously the consequences of negative portfolio volatility. Risk tolerance is somewhat diminished.
n Retirement Age – Investors approaching retirement age, however, may soon not be able to rely on a steady source of income to recover from investment shortfalls.
Ø Investment objectives gradually shift away from long-term capital accumulation and toward a focus on securing the current lifestyle.
Psychological Profiling - Personality Types
2 X 2 Matrix
|
Decision-Making Style |
Decisions based primarily on Thinking |
Decisions based primarily on Feeling |
|
More Risk Averse (Propensity for risk taking) |
Methodical Investors i. Relies on objective ‘facts’ when making investment decisions. ii. Intently follow market analysts or undertake research on trading strategies. iii. Constantly remain on a quest for new and better information. iv. Emotional attachments to investments rarely occur. v. Investment decisions tend to be of a conservative nature. |
Cautious Investors i. Most averse to potential losses. ii. Exhibit Strong needs for financial security iii. Do not like making their own decisions. iv. Not easily persuaded by others and often choose not to seek out professional advice. v. Cautious and tend to over-analyze investment opportunities. vi. Focus on very safe investment vehicles. vii. Investment portfolios generally exhibit - Low turnover and low volatility. |
|
Less Risk Averse (Propensity for risk taking) |
Individualist Investors i. Exhibit independent thought when making investment decisions. Not afraid of doing their own homework ii. Self-confident – Their confidence make them capable of questioning inconsistencies in either recommendations or conclusions made by others. iii. Less risk averse |
Spontaneous Investors i. Constantly adjust their portfolios to contain the latest hot investment. ii. Continually doubt all investment advice and external management decisions. iii. Higher Turnover – The pursuit of the most recent investment craze causes their portfolios to exhibit much higher turnover levels than other investors. iv. Most experience below average return – investment profit are often cancelled out by the higher trading costs generated by frequent adjustment of portfolio positions. v. Risk considerations take a back seat in the investment decision-making process. |
Life Cycle View of Wealth Accumulation
1. Accumulation phase
· Young and Early in career. Time Horizon is very Long so can afford to tolerate volatility (arising from the long time horizon) and high risk. Emphasis should be on total return with growth bias and inflation protection.
· Net worth is small relative to Liabilities
· Priorities include saving for children’s education, liquidity, larger home
· Objectives: can undertake high risk/high return, capital-gain oriented investments.
2. Consolidation phase
· Mid to late career. Time Horizon is still relatively Long and risk profile still fairly high.
· Income > Expenses - Income exceeds expenses
· Accumulation of investment portfolio
· Objectives: seeks high capital gains balanced with lower-risk assets – Should use high-return, high-risk, capital-gain oriented investments; however, a shift to lower risk assets should begin as horizon shortens.
3. Spending phase
· Begins at retirement. Time Horizon may still be relatively long (10+ years). Risk profile is low and total return emphasis should be on income. The portfolio should emphasize fixed income securities with the equity securities providing some inflation protection.
· Expenses > Income - Expenses exceed income and excess is derived form income off investments.
· Retirement, “financially independent”
· Objectives: Income generating, low risk assets should be given emphasis under ordinary circumstances.
· Bottom Line: If the individual can cover income needs adequately, a larger portion of assets can remain in capital-gain oriented investments. Regardless of the circumstance, a portion of assets should remain in capital-gain oriented investments to protect against inflation.
4. Gifting phase
· Final stage pf the investor’s life cycle - Nearing death. The investor is concerned with estate planning and tax minimization.
· The individual possess more assets than she will ever needed
· Objectives: May begin to gift away assets to others in order to avoid high estate taxes.
No comments:
Post a Comment