Creating Personal Wealth

So far this year we have looked at the importance of a meaningful financial life plan and how that may be affected by the creeping stealth power of inflation.

We then looked at making a start on the preservation of wealth you may have already created. This can be baffling to many where too much asset concentration can remove the protection of balance and subsequent growth. If your assets are entirely invested in equities, bonds or property and these markets suffer fluctuations, this can have a devastating effect on your personal wealth.

So, what if you are one of the many expats who has not actually created sufficient wealth to sustain financial longevity? Creating wealth is equally important as the protection of wealth and the projection of requirements.

The approach to the wealth creation aspect of financial planning is rather different in concept, asset allocation and management than the protection of your existing wealth or the way it is used to create income for you as you grow older. With wealth creation we utilise the growth aspects of investing rather than the more traditional balancing approach.

In previous Net Worth articles we looked at the practicalities of dollar cost averaging and compounding growth. This is the reality of turning markets which may be volatile to your advantage by buying cheap when prices are down.

To illustrate, in 2008 we started a real savings plan exercise which we have updated as time goes along. We are investing regularly into a savings plan for a ten year period into two specific equity funds. See the table below for details.

Both funds started out at identical unit prices and are projected to end up at identical prices after ten years. Because ABC fund prices have reduced during the plan period there were more units purchased and thus, at the end when unit prices are the same cost again, there are actually more shares held in ABC plan, enhancing its value phenomenally above XYZ fund which enjoyed steady price rises throughout.

This demonstrates how dollar cost averaging coupled with compounding combine to enhance your investment growth when you are consistently adding new money to your investment pot.

One of the surprises expats get when they visit a financial adviser is to realise that they have not prepared adequately for financial independence. Many will say they will never retire and prefer to work until they drop. However, this is not going to be the practical situation. Everyone gets to a point when they have to eventually stop working because they are physically or mentally incapable of continuing. That is the reference to “financial independence” I make rather than retirement.

As you get toward meeting the goals you have set yourself, you will turn a new corner in having to preserve that wealth and use it to create an income for you to live on.

There are more innovative ideas for managing through that future phase. Assets will need to be utilised in a different way to ensure they are protected and also produce income. As far as possible their base value also needs to be maintained. We will continue with that theme next week.

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Both funds are investing in equities. One has theoretical pricing and is increasing on a steady basis by 9% per annum. The second is a real fund for which we have been buying units at actual prices so far. The history of these comparisons to date is that the actual fund is valued far less than the theoretical one. This is truly good news. Units in the real fund are cheaper and therefore we are buying in at greatly discounted prices by comparison (dollar cost averaging)

In the table actual purchases have been recorded in fund ABC from late 2008 to date. The prices are then calculated to catch up with the XYZ fund at completion of the plan so that unit prices are the same.

Plan ABC is 106,390 or 56% higher in value

Questions for Andrew can be directed to PFS International on +662-653-1971 or email via enquiriesthailand@fsplatinum.com

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Andrew Wood has been an expat in Asia for 32 years and is Executive Director with PFS International. He has been writing Net Worth articles for four years and has made a significant contribution to the PFS library of financial service articles dating back over seven years. These articles which cover the complete A-Z of financial planning are available to readers upon request.