Amazing Facts Entrepreneurship

Over 27 years, encompassing market events such as the Asian crisis of 1997, the Tech Wreck of 2000, the US recession in 2001, the GFC, the European Debt crisis, and more recently COVID, I have seen hundreds of clients’ tolerances tested, but only one has forced the sale of their assets. 

 The hundreds of others have taken our advice and come through far better off. 

 Education is the key to building an appropriate client portfolio and managing wealth, and it begins with gauging the client’s understanding of sharemarkets and bond markets. Delve into their history, and the history of markets generally – ask about risks they have taken and how they felt about them.

Determining the right risk profile is critical to minimising the risk that a client will panic and sell at the wrong time. 

 We spend a large amount of time looking at the probabilities based on market history, which shows that shares outperform cash over time. US shares have beaten cash 86% of the time over rolling decades. For Australian shares, that figure is 90%. 

 There are further layers within each sharemarket that can increase long-term return, including tilts to companies that are more profitable, smaller and/or undervalued. 

All things considered, the appropriate risk profile for a client is based on the following factors: 

• Client cashflows independent of portfolio income 
• Building an appropriate allocation in low risk assets 
• Investing the balance into shares and property 

The determination of a client risk profile begins with a pulse check for general risk-averseness. 

 Then we consider building a buffer in lower risk, more stable investments. This is done by taking into account a client’s own cashflows, generally through work income, then considerations around when they can access their money (relevant for superannuation given age preservation restrictions) and the history of markets. 

 It then comes back to the client’s objectives – do they want to draw down on or retain the real value of their capital in retirement? What capital expenses, such as gifts to children for house deposits or home renovations, do we need to factor in? 

 A risk profile should cover all expected drawings and cashflow shortfalls in the first five years at a minimum, with lower risk assets. This buffer can be extended if the client can afford to take less risk and still meet their objectives. 

 Consistently applying a key set of wealth creation principles, limiting distractions, building appropriate and well-diversified portfolios, and maximising the use of available tax effective entities increases the probability of success, giving clients greater spending confidence. 

 Portfolio construction should focus more on time horizon, risk profile, expected return to meet goals and minimising the risk of a forced sale through defensive assets. Given that markets are always volatile and unpredictable, history tells us that equities should still form the backbone of most portfolios, complemented by solid, liquid, defensive assets. 

Phillip Gillard is a Principal Wealth Adviser for Shadforth Financial Group, specialising in helping executives and business owners build wealth. He has been listed amongst the Barron’s Top50 and 100 Australian advisers every year since the awards began in 2017.