empirical evidence repeatedly suggests that private investors permanently destroy value in their investment portfolios by making short-term decisions driven by emotion. Behavioural Finance is simply the study of why investors (both professionals and individuals) make these irrational financial decisions. Despite being accepted since the 1960s, it is only during the last decade that attempts have been made to incorporate it into investment portfolios. It has been found that wealthy people who are comfortable with risk tend to outperform less wealthy investors because they can afford to ride out the storm, where the layman panics and sells at the bottom, causing short-term market fluctuations to become permanent losses. The correct approach during times of crisis is to reassess the longterm strategy and use it to guide and resolve to stay the course.
Investment Strategy While building wealth may not be easy, eroding it may be more so. Investment returns, although essential, need to be closely associated with a profound appreciation of risk. A successful investment strategy focused on wealth preservation and growth requires starting with clearly formulated goals and the ability to manage uncertainty, which is the key to achieving great success. Risk by its very nature is unforeseen and inevitable. Risk management is the process of
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identifying potential risks and positioning oneself accordingly. So, is success a result of luck or smart risk management? We believe that unforeseen risks are almost impossible to avoid entirely with any degree of skill, therefore successful risk management is more about dealing with risk than avoiding it. A solid investment strategy needs to be forward-focused and incorporate the full complexity of multiple cash flows, the impact of risk and the legal framework to optimise achieving your objectives. Building an investment portfolio strategy for an individual is a complex process that needs to take cognisance of many factors that influence the nature of the investment components. The major factors that need to be considered when formulating an individual investment policy are: • The investor’s risk objectives – ie their ability and willingness to assume risk. In the world of the ultra wealthy, one’s willingness to take risk is often overtaken by the ability to take risk. • The investor’s return objectives, which may be multiple and can change over time. • The time horizons applicable, which again may be multiple, for example pre-retirement and postretirement. • Tax – different individuals and entities have different tax rates. • Legal and regulatory constraints. • Necessary liquidity and cash flow requirements. • Unique circumstances.
A comprehensive investment strategy comprises all assets and liabilities including one’s own business or employment. The resulting investment portfolio is a combination of the understanding of individuals investment asset classes, and how they are likely to interact and move relative to each other. Most importantly, is how best to combine them in your portfolio to maximise the return potential for a given level of risk. Developing an individualised wealth management strategy is a time-consuming exercise requiring the ongoing attention of experienced investment professionals. The result of this is that wealth managers focus their business models on servicing the ultra wealthy, who typically have greater need for their assistance. By focusing on this segment, large wealth managers can often use their scale and influence to negotiate lower administration and investment management fees for their clients, thereby justifying their own costs. They are typically also able to provide their clients with access to unique opportunities usually not available to individuals such as private equity and other alternative opportunities. Supplied by Philip Bradford, Head of Investment Specialists, Absa Wealth. Absa Wealth, a division of Absa Bank Ltd and an affiliate of Barclays Wealth*, serves ultra high net worth and family office clients in South Africa providing investment management, fiduciary services and structured lending solutions. With the backing of Absa Capital, Absa Group and Barclays Wealth, Absa Wealth offers clients a sophisticated, integrated wealth management proposition, centred on the individual, leveraging the depth and breadth of its global and local expertise. *Barclays Wealth is the wealth management division of Barclays and operates through Barclays Bank PLC and its subsidiaries.
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