Protecting Wealth

Making a million can be easier than keeping a million. Going into wrong business ventures, over-gearing and wrong investments are some of the factors that lead to the loss of wealth. All this usually happens because of lack of experience. Protecting one’s wealth should start from day one (of accumulation) because, if you lose it, you have to start all over again. Here are the keys to protecting your wealth.

Continue to make more than you spend

Most millionaires have he reputation of being ‘calculative’ – (a purchase) must be worth the money and they buy only what they need. They also think that prudent saving and spending behaviours should be passed down to their children. Regardless of asset allocation, spending beyond 3% or 4% of your principal is likely to lead, sooner or later, to disaster. If you spend 7% of your wealth annually, you could be facing an 80% likelihood that your purchasing power will drop 20% within 20 years.

Irfan Khairi, the internet millionaire saves 80% of his income every month. “I don’t spend a lot. My biggest expense is paying the loan for my property. I’m not into expensive dinners and holidays. My hobby is watching DVDs, listening to music and working.”

Hai-O agents Azlan Deraman and Siti Rohana put aside 10% in fixed expenses like housing instalments and food, and 25% for income tax. The remaining 65% goes to savings.

Having multiple sources of income helps you to grow and protect your wealth,  When most of your investments are producing more cash flow than you need, your asset is not eroding in value, Good sources of multiple income are business, properties and dividend-paying stocks.

Property millionaire Juanita Chin and her husband, Ignatius Shum adhere to the classic wealth principle of delayed gratification. Despite getting a steady stream of rental income from properties, Chin continue to work as a real estate agent. She teamed up with her husband to generate passive income through their website, 0to13properties.com. “My husband is more tech-savvy, and he’s into Internet marketing. As for my contribution to the website, I share about property investment, and I’ve done quite a number of e-books. The books are subsequently marketed on the website.  We intend to make Internet marketing one of our source of passive income. We make money when someone buys something from our website.”  

Have a contingency plan, take care of the unexpected

What goes up can come down. Sit down and consider the best-and worst-case economic scenarios and how they can affect your financial standing and your assets.

To safeguard yourself from the worst, pay off your largest expenses promptly, says Irfan. “In business, anything can happen. Even if I lose my business, at the very least, I still have my car and home.”

Wealth can be destroyed easily. Think about safeguarding yourself against events that could erode your wealth, such as medical emergencies. Business owners may revel in having a successful business but few think about what would happen to their business and their wealth if something were to happen to them or a key partner. Even if you own a small business, you should also consider ways to structure it so that its liabilities will not affect your personal assets. 

Get protection against inflation and market declines

For some the simple way to protect oneself against market declines is to hold cash. However, using it as a long term strategy puts your wealth at the mercy of inflation.

Diversification and asset allocation can help reduce the ravages of high inflation and market decline. Capital preservation remain a priority for Asia Pacific high-net-worth investors in the short term. As markets recover and risk appetite returns, they adopt a balanced investment approach and increase their allocations to other regions gradually.

The biggest landmine to avoid is over-concentration in a particular investment. The concentrated risk that leads to vast riches is often the very risk that destroy wealth. A single stock position has a less than 50% probability of sustaining wealth over 20 years. But a diversified portfolio increases the probability to 85%. A leverage is another risk. Debt, with a single stock as collateral, can be deadly. If the stock price falls by half, then even it if it eventually rebounds to its original price, the leveraged holder can easily see his wealth shrink by two-thirds in margin calls. 

The Shums are now looking at ways to diversify their investments. “At first, 90% of our money was in property. Right now, we’ve cashed out on three (of 13) properties, and we’re using the money to diversify into vehicles that are more liquid. They park their 10% of their wealth in liquid saving and 5% in the foreign exchange market. “The remainder is invested in various instruments to build up our capital. We’re also looking into putting our funds in blue-chip stocks that pay consistent dividends.”

However, Azlan doesn’t invest in any instruments, preferring to concentrate fully on the Hai-O business. “I feel that investments in stocks and properties are too risky for me.” Recession does  not affect their direct selling business. “In a downturn, many will be looking for opportunities to get side incomes, so we encourage them to join as agents, As we get more agents, they will become consumers and buy more products, so sales volume will go up too. However, when the economy becomes good, selling products will be easier, so we don’t really lose out in both situations.” says Azlan.

Ernie Chen, founder and group CEO of ATCEN International Group, preserves his wealth in properties and his business. He does not invest in the share market as he thinks it is too unpredictable. “I totally disagree with having eggs in many baskets. If you have so many baskets to handle, you can lose your focus.”

Don’t lose it to fraudsters

The wealthy attract people eager to help them manage their wealth. Whole retirement funds have been wiped through fraud and errors in judgement. Remember Bernard Maddoff’’s Ponzi Scheme and the Lehman Brother bonds mis-selling. No one but you should do due diligence before you hand over any sum of money. Recommendations from friends and relatives are not due diligence and they make bad intermediaries. The decision maker and custodian of the funds should be separate entities. If you hire an adviser who co-mingles assets – like a hedge fund – that’s your choice, but you’re taking yet another layer of risk and must do additional, rigorous due diligence. 

Protect wealth within the family

Asset distribution must be planned well so that the transfer of wealth can be done in an orderly manner. Unlocking the assets upon one’s untimely death is key. Upon one’s death, all assets are frozen. If there is no will, your beneficiaries need to obtain a letter of administration before the court appoints an executor who pays the debts and distributes the assets. Without a will, two sureties (guarantors) are required. They must be as rich as the millionaire…and this is going to be problem. Even with a will, it would take some time for the assets to be distributed.

Another way to approach it is to create a trust. Upon your death your beneficiaries will get the benefits, such as rental income and interest income. Millionaires usually use insurance to create liquidity to support and provide for their beneficiaries, They can set up a ‘trust’ that holds their assets, especially their business and properties. The key thing is unlocking the assets upon their untimely death.

[Source: Peersonal Money]