Having made your personal fortune, UBS wealth management strategists advise that the best ways to create wealth are not necessarily the same as those used to preserve it. Diversifying your interests is one way of ensuring your money works for you and avoids you having to make your fortune twice!
In a new report, UBS show that holding assets outside your business can help you reduce swings in your income, make it easier to rebound from any setbacks you might encounter, and maintain your obligations to family and charities. External investments can also help you seize opportunities, fund future projects, and protect your wealth. Below is an overview and the report is available for download if you would like further detail, or you can contact a regional wealth management advisor to discuss your needs.
Everyone faces some degree of concentration.
Even salaried employees are highly dependent on the fortunes of the firm and the industry in which they work. But since entrepreneurs often hold much of their financial wealth in their business, it’s worth looking at diversification to help with spreading the risk this can present.
This focus might be the main reason you have achieved great wealth. The key is to start managing your money to spread risk, working to mitigate against company and macroeconomic developments beyond your control; the tech crash of 2001 or the global financial crisis of 2008 are notable examples of such surprise events. A diversified portfolio is also less likely to be damaged by setbacks in any individual security, sector, asset class, country or region.
Furthermore, a financial portfolio can also provide an extra source of cash income. It can benefit your business too. If you are currently relying exclusively on your business to finance your lifestyle, you may favour keeping a lot of your money in cash for this; however, making a few tweaks can help you to also take advantage of long-term opportunities.
UBS advise you consider these questions:
While you can often bounce back from any setbacks, a robust portfolio can help protect you from having to start over with building your wealth. It’s also worth considering whether your company’s profitability fluctuates so that you can work to smooth available cash to maintain your lifestyle and obligations to family and charities.
UBS wealth management advisors tackle this challenge using the company’s Liquidity, Longevity. Legacy. approach**. The balance you want to achieve is to meet your near-term lifestyle needs without having to make rash decisions that can impair the long-run value of your business. Holding excess cash is usually not the best option since bank deposits don’t rise in value during a crisis.
Consider some of these opportunities you could explore:
Your choice of how to fund diversification will depend on many factors, including the maturity of your business, your tax situation, and your reasons for diversifying.
As an entrepreneur you may be reluctant to sell all or part of your business for a number of reasons. There are ways to unlock funds without incurring major tax bills. Parts of your business may be doing less well, potentially generating taxable losses to offset gains. There are also numerous vehicles that can offer tax efficiency, including exchange funds, charitable trusts, and foundations.
If your business generates cash, drawing on it to diversify can be a good option. More mature companies may create fewer compelling opportunities for which returns exceed the cost of capital. At this point, taking dividends and investing in the market may produce a better outcome.
Debt may have played a significant role in building your business. While many traditional savers focus most on the risks of borrowing, entrepreneurs recognise the opportunity to earn returns in excess of the cost of debt. And when your company is growing fast, borrowing can prevent you from having to sell.
Your wealth management advisor can help you to carefully calibrate your debt against the volatility of the assets you borrow against, the borrowing term, and the path of interest rates.
Having released capital to construct a more balanced portfolio, what should your new allocation look like? The answer to this question depends on your circumstances and risk appetite. Here are five key considerations:
You could consider buying another venture. In the ideal case this could create a second fortune. It would need balancing against your liquidity needs and risk appetite.
Entrepreneurs typically need more liquidity than the average investor, for example to pursue opportunistic business projects or mitigate against short-term business hurdles. You may be holding more cash than you need that can be put to work to earn you a better return. UBS recommend that business owners hold three to five years' lifestyle expenditure in liquid assets. Splitting your portfolio into Liquidity. Longevity. Legacy.** can help you get the balance right.
You may feel unsure about shifting your money from your own business (one that you control and whose “paper value,” if unlisted, stays constant day-to-day), to public stocks in businesses you don’t control and whose value fluctuates on the market.
However, owning a business does not mean you should avoid stocks that offer high potential returns. You can often benefit from building a well-diversified portfolio without making sweeping changes. As is the case for all investors, building your financial portfolio depends on a number of factors. What are your financial goals? How high is your risk tolerance? What is your time horizon?
You may want to “tailor” your portfolio to avoid further investment in regions, countries, or sectors which your business is already significantly exposed to.
If you seek assets that tend to rise in value when your business struggles, understanding what drives your business is essential. If, for example, your firm’s fortunes are closely tied to the economic cycle, investing more in companies less vulnerable to a slowing economy or those that might even benefit from a slowdown could make sense. UBS’ report provides a table of correlations to consider.
One of the bolder approaches is to look for businesses with the potential to disrupt your firm. A new development in this field is coinvestment platforms for “impact investments.” They focus on companies that seek not only to generate interesting risk-adjusted financial returns but to have a positive social and environmental impact. UBS’ report provides a table of long-term investment themes.
**Timeframes may vary. Strategies are subject to individual client goals, objectives and suitability. This approach is not a promise or guarantee that wealth, or any financial results, can or will be achieved.
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