27-04-2017

Managing your wealth: the 10 golden rules

Although wealth management requires individual solutions tailored to each person's own situation, it is always important to bear in mind a set of intangible investment principles. David Schmidt, Head of Private Banking Investments at Banque de Luxembourg, reviews the 10 core principles for successful long-term wealth management.

1 / Define your investor profile

To define the profile, you need to distinguish between your capacity to take risk and your willingness to take risk.
Your willingness will be down to your individual perception, a function of your own degree of aversion to risk, whereas your capacity to take risks will depend on three criteria linked to your situation: your investment horizon (the time factor), the extent of your wealth, and future spending related to your plans.

2/ Construct a diversified portfolio tailored to your risk profile

Diversifying your portfolio will enable you to reduce the risk borne by the portfolio overall. Diversification can be geographic or by asset class (equities, bonds etc.). A well-diversified portfolio is better equipped to withstand crisis periods than one invested in a single asset class.

3/ Adjust your portfolio for each major stage in your life

You have to adjust the composition of your assets to your life and situation. For example, it is better not to invest the money you will need to finance the purchase of your home in the next year in equities. On the other hand, significant exposure to equities is appropriate if you have your life before you.

4/ Invest for the long term

Investing for the long term helps smooth out market ups and downs and limit the impacts of the inevitable crises along the way.

5/ Stay invested rather than try to anticipate the market

Anticipating the market can be very chancy. Selling off positions when you expect a market downturn also entails the risk of losing the profit when prices go up in the future or missing the best time to get back into the market. Staying invested also means you can continue to derive the benefit of reinvesting dividends.

6/ Invest regularly

This is the only way to build up wealth over the long term: you can average out the purchase price if you invest during both and up and down phases on the markets.

7/ Control your emotions

Emotions are the worst enemy of investors, making them feel they have to act in uncomfortable or unexpected situations.

8/ Keep reasonable expectations for yield

The expectations for yield must be measured, bearing in mind that years of above-average yield may be followed by negative years.

9/ Be wary of fashionable trends and successful stocks

Following fashionable trends and investing in successful stocks is a sure way of being exposed to the risk of a definitive capital loss.

10/ Understand your investments

It is vital to invest in solutions that you understand and to avoid over-complex products. You must choose quality stocks as, even though they can suffer a temporary loss, they will not fail in the long run. Furthermore, you must not pay too much for them as the price paid determines the future return of any investment.
 

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