Six Secrets of Wealth Preservation. Susan Hirshman Managing Director, CFA, CFP, CPA, CLU

Transcription

1 Six Secrets of Wealth Preservation Susan Hirshman Managing Director, CFA, CFP, CPA, CLU

2 01 Clients interests and goals change It takes extraordinary energy to create wealth But, it takes an equally concentrated focus to preserve wealth The wealth journey Creating wealth Sustaining wealth Intention to partake in activities that depend on long-term funding or that require significant current expenditures

3 02 Wealth preservation 1982: first listing of Forbes years later: what names have remained on the list? Less that 15% are still on the list Why did people drop off? 141: death and distribution 205: wealth did not grow fast enough or was eroded

4 03 Causes of slow wealth growth and erosion There are six major causes: 1. Over-concentration 2. Our own behavior 3. Over-spending 4. Taxation 5. Family discord 6. Liability issues

5 04 Concentrated stock positions may produce higher returns, but also have substantial risk Expected long-term risk/reward trade-off of a sample diversified portfolio in an efficient frontier framework 100% single stock Increasing return Diversified portfolio* 50% single stock/50% diversified portfolio* Increasing volatility *65% equity/35% fixed income The above chart is hypothetical and shown for illustrative purposes only Source: JPMorgan Asset Management

6 05 1. Concentrated positions Biggest land mine for wealth preservation Proof statement: S&P 500 in 1990 how many of these companies are still in the index? Less than half Substantial price decline resulted primarily from external factors beyond the control of management: litigation, obsolescence etc. i.e. Wang Computers

7 06 Significant drops in wealth can occur suddenly Sudden declines: selected S&P 500 companies with weekly declines greater than 20% in the past year* Stock % decrease** Week ending*** Marsh & McClennan -48% October 19 Maytag -35 April 28 Quest Communication -32 August 9 Merck -30 October 6 MBNA -21 April 22 Source: FactSet * Past year was 07/20/2004 to 07/19/2005 ** Calculated as a cumulative 5-day price change in the stock through the week ending. *** Week ending is the last day over the 5 business/market day over which the cumulative return was calculated. For example, Marsh & McClennan price decline of 48% was recorded between 10/12/04 and 10/19/04. The inclusion of the securities mentioned above is not to be interpreted as recommendations to buy or sell.

8 07 2. Our own BEHAVIOR Overconfidence Anchoring Recency Effect

9 08 3 basic human irrational behaviors 1. Overconfidence Overestimating one s own abilities 2. Anchoring Fixating on one piece of data or point of view 3. Recency effect Overemphasize recent events when making decisions

10 09 3. Spending Studies show that over spending is very common among the affluent Second homes Charitable Gifts Art/Collectibles Health Care Costs Think like an institution: Develop appropriate spending and asset allocation policies that lead to long-term preservation of real wealth Think in terms of percentages of wealth vs. absolute numbers Percentage spending leads to annual spending fluctuations that reflect market performance Monitor every year: do we see an increasing percentage of assets over time?

11 10 3. Spending Think about the following questions: What matters more current living or maintaining your wealth? How much wealth erosion can you tolerate? Will you outlive your wealth if you continue to spend at your current rate over the next 15 to 20 years? What is the asset floor beneath which you do not want to slip? What is the legacy they want to leave?

12 11 4. Risk - Taxes Aversion to paying income taxes may lead to increased investment risk Do not want to realize gains because of the tax consequence Always looking for the next best thing and forget to pay attention to the simple strategies Insufficient focus on transferring wealth may increase tax liabilities as well as hurt additional goals that extend far beyond saving taxes

13 12 5. Family dynamics Effective family governance is a must! Only about 30% of all family-owned businesses survive into the second generation 12% in the third generation 3% through the 4 th generation and beyond The origins of the 70% failure rate in estate transitions lie within the family itself: Breakdown of communication and trust within the family unit Inadequately prepared heirs Lack of a family mission Poor planning Source for above statistics: Five Steps to a Successful Transition of Family Wealth & Values by Roy Williams and Vic Preisser

14 13 5. Risk - Family discord Family Mission Statements help provide a reason for the family to remain together for future generations. They create a legacy of financial unity and success Family Past Goals and Values Future Assets Community The above chart is for illustrative purposes only.

15 14 6. Risk - Liability Litigation A new lawsuit is filed every 30 seconds in this country. and your chances double or triple as the value of your assets increase*. Divorce 75% of all divorced people re-marry, half of them within three years** 43% of first marriages end within 15 years** Red states have a divorce rate 27% higher than blue states** Leverage Understand the risks Theft Exercise care in granting powers of attorney Who has access to your financial information? Sources: *How to Legally Protect Your Assets by David Tanzer **

16 15 6 Secrets of wealth preservation 1. Over-concentration - Shifting wealth from the asset that has created it to a diversified portfolio of risk and returns should be driven by a families passions and goals 2. Our own behavior - It takes extraordinary energy to create wealth.and It takes an equally concentrated focus to preserve wealth 3. Over-spending - Can only be identified by understanding long-term goals and legacy desired 4. Taxes - Deciding when to pay taxes should be an economic decision, not an emotional one 5. Family discord - A Family Wealth Mission Statement should make the family stronger, more cohesive and enduring, so that the success of one generation can pass to the next generation 6. Liability issues Anticipate what can go wrong and do what you can to mitigate it

17 To preserve wealth a balance between maximizing return & minimizing risk should shift 16 From Creating Wealth To Sustaining Wealth Big bets + Big leverage Diversified assets + prudent leverage + controlled spending Maximize return Minimize risk

18 17 He who can see three days ahead will be rich for three thousand years. Japanese Proverb

19 18 JPMorgan Asset Management This piece is for information only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The information in this piece is not intended to provide and should not be relied on for accounting, legal, tax advice or investment recommendations. The views and strategies described in the piece may not be suitable to all readers. JPMorgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include J.P. Morgan Investment Management Inc., and its affiliates, including, without limitation, JPMorgan Investment Advisors Inc., JPMorgan High Yield Partners LLC, Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc. JPMorgan Chase & Co., September 2005 NOT FDIC INSURED NO BANK GUARANTEE MAY LOSE VALUE