Most wealthy people want to save money and protect them from inflation. But what to do with your own assets?
At the dawn of my career, I heard the phrase of one of the leaders of the current Forbes list: there is business, but there are personal assets, and these concepts need to be separated. This idea seems to me very true. Successful periods do not last forever, and you can wake up at some point with the realization that all the funds were invested in one object and … burned out. It is a pity, many do not even think about it.
A key aspect that people often underestimate in business and overestimate in portfolio investments is risk. When discussing with a potential client the feasibility of forming a personal investment portfolio, financial advisors often come up against the objection: why do I need this? Why invest somewhere if you have your own business that brings real income? Why consider conservative investment strategies and financial instruments with an expected return of 5% in dollars if the business brings many times more?
Let’s look at the statistics. According to the unified state register of legal entities (USRLE), for two consecutive years, commercial companies have been created about one and a half times less than they are shutting down (430,000 compared to 699,000 in 2016, 390,000 against 592,000 in 2017). According to the estimates of the Center for Macroeconomic Analysis and Short-Term Forecasting, the number of bankruptcies in December 2017 reached its maximum value in eight years. The saddest situation is in the construction industry and trade, but in other non-industrial sectors, the intensity of bankruptcies is growing. At the same time, there are more and more large bankrupt companies.
Unfortunately, people tend to overestimate their capabilities. Credit risks, market, counterparty, operational, technological, currency, country, regulatory, as well as risks of force majeure and unlawful actions – all this can create conditions under which the existence of the business becomes impossible, and, as a result, lead to loss assets. This is reality. Neither businessman nor investor can avoid risk, however, they have the opportunity to hedge it.
According to my observations, successful companies often develop solely at the expense of owners’ capital. However, many have the opportunity to attract debt financing, replacing them with their own funds. Why borrow if you have your own assets? In my opinion, there are three main reasons for this.
First, you insure against the complete loss of your assets. In case of failure, you will have a chance to “restart” the business and take care of loved ones.
Secondly, the availability of borrowed funds increases the return on invested capital. At the same time, a business that brings stable income will cover interest on debt servicing.
And in some situations, with the help of borrowed capital, you can protect your company: the correct ratio of equity to debt burden can make a business unattractive to third parties, and therefore reduce the risk of “hostile actions”.
Of course, debt is also a risk. But this is not an absolute evil, even in a situation where there is no need to attract it. Borrowed funds are a bank loan or corporate debt. In Russia, the volume of loans issued by banks to non-financial organizations is three times more than issued corporate bonds. At the same time, last year the volume of corporate bonds in circulation grew by 36%.
There are several reasons for this. Firstly, the decrease in inflation and the key rate of the Central Bank allows borrowers to raise funds at a lower percentage. Secondly, the fact that banks, large institutional investors, experience a surplus of ruble liquidity and a shortage of high-quality issuers plays into the hands of those wishing to raise funds in the stock market. Thirdly, citizens have serious benefits that spur demand for debt and increase the size of the market itself: since the beginning of 2018, coupon income on bonds (issued since January 1, 2017) is not taxed, as well as on deposits.
You should not think that the stock market is accessible and useful only for large businesses. And while for now the main borrowers are precisely large companies with high credit ratings (about 70% of all new placements last year fell on them), I am sure that the situation will change.
Another question: what to do with own assets, which are put aside? There are no universal recommendations: investment tools and methods are selected depending on the goals and when you are going to start spending your savings. Most wealthy people want to save money and protect them from inflation – they invest the bulk of the portfolio in the debt market and investment funds. There are those who are willing to take risks – they increase the share of stocks or high-yielding bonds, play out individual market situations. I see many portfolios of wealthy clients – and among them there are no identical ones.
In my estimation, wealthy clients invest more than 55% of their assets in debt instruments, 30% in stocks, the rest in foreign currency and alternative investments. People begin to better understand financial instruments, so they are ready to consider hedge funds, private equity, venture funds and individual projects.
Wealthy people change their view of investment. If five years ago, almost 100% of our clients ’funds were invested in securities with Russian risk, today it is already less than 50%. A tenth of the total portfolio is invested in securities of emerging markets, a quarter – in the US, the rest – in the assets of European, Asian, Arab countries. Today, people reasonably believe that if they assume the risks of doing business in one country, then their savings should be distributed as much as possible.
The correct result of managing personal money is a situation in which, at the time of the end of your employment, investments generate a cash flow that is sufficient for all your needs. This is a minimum program, and it is achievable. You can judge how effective investments can be by this Forbes rating: many of the leaders on the list are owners of public companies whose securities grow and bring investors outstanding income.