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Building Wealth
Building wealth - Why? This is pretty straightforward really - it's all about fear and greed. It's human nature to protect and survive just in the days of our caveman ancestors right up to today- we all want to get more for less, none of us really want to work for someone else.Granted that work is a sociable place to be (pretty much) and that employers generally try to make this a tolerable experience as they need a workforce. Everybody wants more money until they feel that they have enough ( when's that?). Essentially, we all want more and we want to have enough so that we don't have to worry. We worry that we won't have enough, so we want more. It's all to do with fear and greed. This is the same the world over - see what my friend Tom from Australia has to say about wealth and wealth management resources. Of course once you have enough then you may have some socially responsible schemes to be able to give back to your community.
Investment Activity Stages - Worker or Investor?
It's obvious: everyone has to start building wealth by investing somewhere and generally that's in paid employment. However, if you don't invest you'll only ever spend your money and have nothing to show for it at the end of the year / decade. And of course it's all relative. If you don't earn much, then you probably won't be able to save to invest but if you earn well then you'll have tons of money left over for your wealth management enterprises! Acceptable Risk Every investor, large or small, will have a degree of acceptable risk that they will feel comfortable with, within themselves. This may have everything to do with the amount of money that they can earn in a year. For example, an unskilled worker may revel in the fact that they can earn £15k pa, whilst a newly qualified trainee solicitor can earn 'only' around £50k. It's about how much you can afford to lose and not to mind. Having assessed the level of risk that is comfortable, the investor can then decide what avenue to explore next. Asset Classes There are four asset classes that can be used when building wealth. Cash, Bonds, Shares and Property are all assets where investors can make money and to build wealth effectively but a person has to invest first in something to build wealth. Cash is the easiest and most liquid and least rewarding asset to invest for a not great return. BUT it offers 100% guaranteed return for whatever the cost of money is in the country. Bonds either give you a guaranteed rate of return - or a guaranteed sum when the bond matures or both. Some are government backed (Gilts) or can be offered by a company. Bonds offered by a company range from debentures (loans guaranteed against fixed assets) to slightly riskier assets). Shares are a well known asset: the more reputable shares in the UK are constituted within the FTSE 100. Shares are an interesting asset as they are easily tradeable (for the most liquid markets - The Peruvian market only opens for a few hours every week!). Shares give the investor a great opportunity to invest in a company and make or lose money. Many who do not understand how the markets work would rather trust a bookmaker! The last asset class is investing in property - keep reading!
Yields and Capital Gains In building wealth effectively,
Gearing An essential part of any strategy is to add to your money invested and increase the amount of this by borrowing from others - generally other investors or banks - known as gearing or leveraging. The more you borrow against the amount you have invested means that you'll have a higher geared / leveraged investment. When it comes to buying property, most investors will want to put in the least amount and maximise their mortgage, maximise their income and decrease the amount of tax payable. That's great for a rising market but what if the outlook for capital appreciation in property was poor, you might consider to not buy at that time or if you did, to buy the property for less... the lower the gearing the less risk you'll have of the bank asking for their money back as you'd be able to raise it against the asset. So the trick in building wealth is to make sure that you can invest in something where you will get an income as well as a capital gain. But how much to invest? Well if you took the amount of money that you have available to invest and figured out really what you could afford to do without, then that is probably sensible - although different people have different aspirations. Some will want to do
socially responsible investing just because they can afford to and because they want to..!
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