Understanding Good Investment Strategies

Preface

We shall attempt within the following pages to address some of the fundamentals associated with successfully selecting and overseeing investment vehicles to meet specific financial objectives. As this subject will attempt to encompass a spectrum from simple mid to long term accumulation programmes, to sophisticated trust and Private Portfolio Management vehicles coupled to waiver forms, basic tax, mathematics, pertinent historical data and offshore centre issues. Subsequently, this section will be developed over time, we address below some fundamental information, by way of the initial platform.

Fundamentals

Most investors throughout their working lives, seek to create the various platforms which will enable them to meet significant financial goals. Commonly these would be: 

• A Retirement Fund adequate in size to ensure that whatever the span, that they have a sufficient annual income, to allow them to sustain the quality of life they became accustomed too, without worries, or the need to become a financial burden on their children.

•  An Educational Fund adequate in size to cover the cost of the best University education their children can aspire to.

•  Short term investment opportunities offering higher returns than available through normal bond and bank deposit schemes.

Depending on the reader’s nationality, geographical location, employer and perhaps more importantly, the lessons taught to them as young men and women about money and saving by their parents and/or mentors, will influence considerably their ongoing and future financial well-being.

A European, United States and Canadian citizen will normally have had an advantage over their counterparts simply because by law either the state will deduct part of their income to meet the minimum requirements set by statute to ensure health and retirement standards. More importantly, nearly all medium to large organizations will have in house retirement programmes whereby the companies will often match the monthly contributions of the workers ensuring a substantial fund when retirement is reached.

With this platform most of the professionals and executives located within these countries or at least, if located outside, are working with a major international company have access to these fundamental programmes. They are therefore in the lucky position of enabling individuals to address additional surplus investment programmes to meet family or private needs and aspirations, knowing that their long term retirement needs are basically facilitated. This is not always the simple solution it seems, as we shall discuss later.  

Never the less, the very fact that these questions are raised, the minute they begin employment, ensures that at least the basic exercise of analysis of the options is undertaken. Equally, the governments of those countries understand the basic fact that if the individual does not take care of their own long term financial needs, then it is very likely that they must. Subsequently, governments create tax incentives to encourage individuals to become investors and major fund managers create simple programmes to facilitate these needs. Therefore, one rarely meets a professional from those countries without at least a basic understanding of both their likely needs and the options available to them. More importantly, from a relatively young age they begin a programme of discipline, which enables them to create investment vehicles throughout their lives, to meet strategic financial goals.

Those other individuals not so blessed with stable governments or without an “In house” company retirement facility and/or without the early advice readily available to their luckier brothers and sisters, either by the system or by parental/senior family or mentor assistance, often find that local advice to EG. Invest in property, businesses or stock markets are doomed to the vagaries of political and economical events beyond their control. Those that had the forethought to independently seek to provide for their financial future are shocked to find years later, that what was promised within their investment as to meeting their needs, was actually grossly overstated, and their retirement, rather than years of leisure comes a diminishing reality. Worse still, are those whom invest directly with a broker over the years and find that monies given for investment were never placed where agreed and even sometimes never placed at all.

Most adults, with a modicum of logic understand the need to provide for bad times and future personal and family needs.  A simple example is college education for children. If the desire is to educate them overseas in the US or Europe…Then if your child was born in the mid 1980’s… Then a three year college degree starting today will cost between $50,000- $75,000US, depending on the type and quality of the education sought. In Europe, those, university educated know that their children will follow in their footsteps, often within months of their birth, they begin the process of discounting the cost. If not at birth, then, certainly as soon as the scholastic record confirms that their child has the educational discipline and quality, to meet university standards. Few intelligent individuals believe its prudent or sustainable to expect to meet annual college fees out of some anticipated future income, nor reduce the possibilities of their children’s future, by being constrained financially. They therefore choose programmes  which will assist them to discount their commitment.

The chart below demonstrates over, various years…8,10,12% average annual growth projection for an education fund of $60,000, how some  individual, by forward planning not only achieve the required amount, but actually discount the amount needed.

As you will see from above, with a conservative 8% average growth each year over 10 years will require a $44000USD in total. A real discount of 26% against $60K. $40,000USD or $36,000USD would be able to meet the $60K if averages of 10% or 12% Annual growth was experienced. A 33% and 40% discount respectively, on the full cost of the education.

Those individuals allowing 15 years to accumulate the necessary amount, find that $2381USD, $2037USD or $1780USD per annum, if 8%,10% or 12% averages are met gain 40%, 50% or 55% discounts respectively.

Parents whom begin the future Educational needs of a child at birth, gain greater benefits. $1790USD, $1478USD or $1217USD per annum, if 8%,10% or 12% averages are met gain 46%, 55% or 64% discounts respectively.

Those wishing to educate their child nationally and arrange for a masters degree international, using 20 years to accumulate $75,000USD need $1476USD p.a. at an average growth of 10%. Gain a $40,000USD discount.

The above is a simple exercise of common sense and basic mathematics. It would be incomprehensible, not to take advantage of such a programme if the annual amount was comfortably met out of income or capital, or a combination of both. If, as many young married couples find, whom are paying mortgages etc., that their income does not allow them to meet all of the annual amount. Then whatever amount, is comfortable, should be invested to begin the process and if a plan to increase the annual investment amount by the same percentage as they gain through any salary and bonus increases throughout the years, then, if not all, a considerable part of the necessary education fund will be achieved.

If we compare a British professional with their equivalent, in less well serviced areas of the world, we find a striking difference. 15% of their net of tax earnings are within some form of easily accessed investment. When we add the contributions to their company in-house private pensions schemes, this is raised to an equivalent of 23%. This disciplined foresight and breadth of investment planning, ensures that throughout their lives considerable funds become available from time to time, to meet, not only their family obligations, but also, their dreams.

To use a simple metaphor, they travel across the desert of life, with the confidence of knowing that many oases and pre-established, food and water dumps exist to ensure a safe and comfortable journey.

If in comparison, we continue the metaphor as applied to their counter parts in other countries… Many are ill dressed or equipped to meet the most benign circumstances of the journey. In their case the most favourable of condition must prevail, at all times, throughout the period, for any likelihood of survival never mind success.

We addressed earlier, the fact that education at an early stage of ones life, can provide the necessary discipline, to ensure financial security throughout an individual's life. What are the reasons therefore why they are not created and applied diligently. In the main, it often depends on the culture an individual is born into. If the extended family have had little experience of saving, outside of buying apartments and such, for medium to long term investments to provide rental income and as a hedge against inflation or difficult times. Then it is not remarkable that their offshoot and siblings, will not follow. Equally, the financial services revolution, either passed them and their countries by, or the complexities and number of options that are available today, are so difficult to assess and measure, with any degree of confidence, that decisions are often postponed for some future date.

The expressions "Sods Law" or " Murphy's Law" and as a Scot my favourite, loosely translated from the Scot's poet Robert Burns… "The best laid plans of mice and men often go astray". All of these, relate to the reality, tested by historical evidence, that if something can go wrong, then it will.

I have met over the past few years, many retired individuals, whom on paper are US dollar millionaires in property. For years, they lived very comfortably on the rental income provided, by expatriate renters. These investments no longer provide either an adequate income or safe haven for capital. Some have had to sell at massively discounted values. Others worked for Large national companies who did provide retirement plans. Five years ago it provided a livable income. Today, they exist on one sixth of it's purchasing value.

There are too many sad examples I can give to demonstrate the problem. Universally, these individuals offer to write testimonials of the urgency and the need of diversification. The example above of the property holding individual, if only a small part of the rental income had been invested into a tailor-made, capital accumulation programme over the years, would have provided the funds to meet their ongoing quality of life needs for as many years as necessary to see the value of their property return to normal levels. The retiree, if a small amount of disposable annual income had been directed to a supplementary private retirement plan, would today be able to experience the quality of life standards he expected, rather than looking for a part time job to earn enough to meet a basic lifestyle.

To imply, that these type of experiences are unique solely to developing countries, would be disingenuous, in the USA and Europe, many similar examples exist. However, availability of diverse opportunities are such, as to minimise the impact of political and economical events beyond their control, even scandals such as Enron and its like. The simple truth is that those individuals who made provisions to meet their long term goals and heeded the warning " Not to put all their eggs in one basket" are generally in a better position to meet their long term goals and preserve their dignity coupled to their expected quality of life.

Over the past two years, we have experiences, which confirm these sad examples. Many of our new professional clients list the fact that, in the light of current conditions, they now must take care of their parents needs. They do so with "love and affection". However, their own investment programmes are instigated to ensure that their children will never have to face the same dilemma. They all state unequivocally, that they will under no circumstances, ever allow their children to see the same loss of dignity in their eyes, that, they have recently experienced with parents, whom throughout their lives had met their family commitments and expected to experience a long and happy retirement.

In this context, we meet people with poor performing , costly investments and although we would have wished that they were better invested, never the less are happy to see atleast some provision was made to the future and that no matter the quality of the company or vehicle chosen, were so much better placed ride out, those inevitable difficult times, that humans are fated to meet.

Next: Retirement Philosophies

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