Opinion: Protect Your Wealth – Because Going ‘All In’ is Too Risky

05 June 2017

Dr. Patrick Cettier, Founder, Prio Partners, Zurich

We often ignore something that we know we should do — possibly because it seems too complicated, we are concerned about the outcome, or it’s simply a matter of procrastination. Delaying the necessary has become common in a time when people are overwhelmed by information, too many choices, and an uncertain future… and wealth management often suffers as a result. Financial discussions are not something people typically enjoy and many have had disappointing experiences despite rosy promises. Wealth management is nevertheless critically important and should not be overlooked.

Here are some important points to consider when trying to maximize one’s finances in today’s complex and challenging financial landscape.

Supercharge Your Finances

Money is the reward for hard work and delivering value to others, and one’s wealth is typically stored in the form of various assets. However, wealth is also easily lost, be it through careless use (investments that have gone bad), depletion (excessive consumption), or external influence (the tax man or confiscation). This has huge, adverse consequences for your wellbeing, financial independence, family and business. Look for assets that continue to deliver value to others — that’s when cash flow returns to you in a constant stream.

Create Opportunities and Hedge Your Bets

Building wealth is a high-stakes game in the beginning. You put everything behind an idea that you believe in and, even if the risks you take are controlled, it can still be compared to a novice poker player going ‘all in’. It is usually either marvelously successful or a miserable failure, with very little in-between. However, the game changes once wealth has been created. Now it becomes comparable to more experienced poker players — to win tournaments, they need the ability to survive for many rounds and going ‘all in’ too many times is not practical. Experienced poker players have very good judgment, calculate probabilities, and avoid being fooled. They create opportunities without overpaying for what’s in the pot. The game is therefore more about creating options and hedging bets. Similarly, you need to create optionality with your wealth and diversify your assets.

Wealth Created Locally Should be Protected Globally

Like most people today, wealth has become mobile and global, which brings focus to the question of how global wealth should be organized. Similar to not going ‘all in’ with your money, you also don’t want to be ‘all in’ in a single country. Diversifying your wealth globally is about storing and growing your wealth in the long term.

Five Steps You Should Take

Here are five simple steps to help you keep your wealth charged, create opportunities, and diversify your assets.

Step 1: Diversify globally

The deteriorating geopolitical climate has seen an increased focus on safety and security. You should jump at the opportunity to get access to stable countries such as Switzerland for their enduring capital-friendly environment and strong legal and political systems.

Step 2: Stop the bleeding

Make sure that your cash inflow is higher than your cash outflow to maintain your wealth — cut your trophy assets.

Step 3: Store your wealth and create optionality

When exploring options for the best storage for your wealth, the following framework will help:

  • World Inc.: If history is any guide, the world will prosper in the long term and with it will come wealth and opportunity. Participate through a global allocation in equities (e.g. MSCI World or a similar simple and cheap passive fund)
  • Buffett style: Besides an investment in the world itself, you ideally should also have a collection of world-class companies in your portfolio (e.g. start with Berkshire Hathaway if Warren Buffett’s track record is acceptable to you)
  • Emergency backup: Make sure you have safe-haven assets as insurance in case of unexpected financial breakdowns (e.g. a market crash). Some cash, gold and some corporate bonds will do the trick.

 

Step 4: Never overpay

Remember that a good asset is only a suitable investment if you acquire it at a low price. On the other hand, the market often pays crazy prices for what you own. Rebalance your portfolio and your wealth by following this simple rule: Buy low, sell high.

Step 5: Always get a second opinion

Diversify your advisors and wealth managers and always remember that all great market crashes happened due to groupthink. Don’t rush over the cliff like a lemming without a parachute.

Protect your wealth to enjoy a life without financial concerns. Because going ‘all in’ is risky, you should create optionality and hedge your bets. Build a diversified portfolio that will boost your finances.

 

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