How to Preserve Your Wealth

Nobody likes losing money, yet risk is an unavoidable part of investing. A balanced approach can help to protect your wealth. 

Making money is hard enough. Keeping it is even harder. As the Covid-ridden economy continues to wobble, investors across the world are keeping one eye on growing their portfolios and another on protecting and preserving what they have. “Everyone is worried about losing capital, whether you’re a high-risk investor or not,” says Anthony Palmer, Group Commercial Director at Carrick Wealth. “Wealth preservation is about investment, but it’s also about protecting your assets from other people.” 

Those “other people”, he says, include potential creditors. “If you’re an entrepreneur who signs personal surety for a business, or you’re a company director who takes joint and several liability, we’d look at protecting your assets from that.” 

There’s also the taxman. “Tax is one of the primary drivers of our clients’ frustrations,” Palmer says. “When you pass away there are executor fees, capital gains tax, inheritance tax… One of the questions we would look to answer is: how can you legitimately reduce or defer those taxes?” 

Then, of course, there’s the investor themselves. “Sometimes, part of a financial advisor’s role is to protect clients from themselves,” says Palmer. “You have to think about the downside and not only your potential gains. Some people don’t – especially entrepreneurs, whose businesses are built on taking risks. Our role as advisors is to build bespoke financial plans for our clients very specific needs and also to ensure that the risk is appropriate for them.” Ultimately, he says, a diversified portfolio is the only true, time-tested strategy that can protect your portfolio through different market cycles. 

Know your risk profile  

The common perception is that younger people are happy to take on more risk, while older people are more risk-averse. But every individual is different and age or life stage has less importance than people think with their investment risk profile. “You could be 20 years old, starting out, and be very cautious and not want to lose your money or you could be 70 years old, and have accumulated massive amounts of wealth, and be a high risk-taker. In our business, everything comes down to the individual client. Broad brushstrokes don’t work,” says Palmer. 

Your risk profile is determined by three factors: 

• Risk tolerance, which is your inherent appetite for risk;
• Risk capacity, which is linked to your financial ability to take on risk; and
• Risk required, which is how much risk you need to take on to achieve your desired investment outcomes.

“Risk required is what catches people out,” says Palmer. “That’s when we have to say to the client: ‘You have a low risk tolerance and a low-risk capacity, but I’m sorry, if you don’t want to run out of money, you’re going to have to take on more risk.’ And that overrules everything else.” 

A balanced, three-bucket approach  

Wealth preservation becomes especially important when you’re in drawdown – in other words, when you’re retired, and relying entirely on your investments and savings to support you.  

“You need to go to sleep at night knowing that your money is safe,” says Palmer. “In this case we normally break the client’s investments down into three buckets. Bucket one has a very low-risk investment profile, which takes into account two years of drawdowns. Bucket two has a balanced risk profile. Bucket three is higher-risk and usually 100% equity either locally or offshore. Buckets two and three will need enough oxygen to grow, and you don’t want to be drawing down from either when the market is down.” 

When you review your investments, your advisor might see that bucket two or three are looking healthy and advise that you take some money out of one of them to top up bucket one. This allows for both wealth preservation (bucket one) and investment growth (buckets two and three), explains Palmer. The ‘bucket’ approach is particularly useful given the growing trend towards greater longevity. “In the old days you’d retire at 60 and pass away by 70,” Palmer says. “Now people are living to 100, so if you retire at 70 that means your money still has to last another 30 years. The harsh reality is, most people have insufficient funds to maintain their current lifestyle in retirement.” 

In this situation you’re required to take on more risk to sustain yourself, even though you don’t want to because of where you are in your life cycle. And that’s where your three buckets come in. The value contained in buckets two and three will go up and down, but bucket one will tick along nicely with a focus on capital preservation.  

While the risk will remain – after all, that’s the nature of investing – having a balanced, diversified portfolio (and knowing that there’s a plan behind it) should alleviate much of the anxiety that comes with managing one’s financial future.