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22 januari 2016

cxo magazine

Door cxo magazine

Wealth management: 10 golden rules

Wealth management requires individual solutions that are tailored to the client's circumstances. Nevertheless, there are a few golden rules that should always be kept in mind.

Wealth Management.jpgLe Luxemburger Wort recently published this article by Peggy Damge, private banking adviser for residents at Banque de Luxembourg, in its "Talking about Investment" column.

Getting married, starting a family, buying a property, financing your children's education, preparing for retirement... Every new stage in life has an impact on wealth management and requires personalised solutions. However, when it comes to investing, there are a few prevailing rules that remain true, regardless of the individual and the market situation. Here are ten that we regularly bring to the attention of our clients.

1/ Define your investor profile

To define your profile, you first have to distinguish between your capacity and your willingness to take risks. The latter is a subjective concept involving each individual's general aversion to risk. The capacity to take risks, on the other hand, can be assessed objectively. It depends on three criteria linked to your situation: your investment horizon (the time factor), the extent of your wealth and future expenditure based on your plans.

2/ Build a diversified portfolio that matches your risk profile

Diversification reduces the portfolio's overall risk factor as the risk-return ratio of the various assets evolves asymmetrically. As the 2007-2008 crisis confirmed, a diversified portfolio stands up to periods of volatility better than a portfolio invested in only one asset class.

3/ Tailor your portfolio to the important stages in your life

The weighting of your assets should be adapted to your life circumstances. For example, if you will need money to buy a house next year, it would be unwise to invest it in equities now. On the other hand, strong exposure to equities is appropriate if there are no financial constraints on the horizon

4/ Invest for the long term

A long investment period helps to absorb market fluctuations and limit the effects of inevitable crises. Between 1926 and 2012, 28% of one-year investment periods resulted in negative performance. When analysed from a five-year perspective, those losses dropped to 14%. Not one 15-year period ended in negative returns.

5/ Stay invested, rather than trying to time the market

Market timing is very risky. By short selling in anticipation of a market downturn, you risk losing the benefit of higher prices in the future and missing the right moment to return to the market. As long as you stay invested, you continue to benefit from the power of dividend reinvestment.

6/ Invest regularly over a long period

This is the only good approach to long-term wealth management, as purchase prices are moderated in periods of growth and market corrections.

7/ Learn to control your emotions

Emotions are the worst enemy for investors, often forcing them to take action in uncomfortable or unexpected situations.

8/ Keep your return expectations realistic

Thanks to very accommodating monetary policies, money markets have been climbing almost constantly since 2009. It would be wise to limit your return expectations for the coming years and accept that a reasonable annualised return, for example 4% over a long period, is an average. It does not necessarily mean that there will be a return of 4% every year. Years of above-average returns can be followed by years of negative performance.

9/ Don't trust passing fads and "bestselling" securities

Following trends and investing in "bestsellers" is a sure-fire way to expose yourself to the risk of permanent loss of capital. This was a hard-earned lesson for investors in Solarworld in 2007-2008, a company burdened with debt and over-dependent on subsidies.

10/ Know and understand what you are investing in

It is essential to invest in quality assets that will pay off in the long term, even if there are temporary losses in the short or medium term. It is equally important to avoid overpaying, as the price paid determines the return on all investments.


Source: Banque De Luxembourg