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Investment Advice and Planning: Strategy - Module 3.1 Wealth Creation

Edward Ketterer • August 26, 2021
Income

It is never too early to start Wealth Creation and seeking professional advice as early as possible can be a formula for success. “Managing Expectations” and appreciating the benefits that go with recognizing that “Diversification and Investment Timeframe” are fundamental to this formula.


Wealth creation is generally established by setting a goal behind investing excess funds – after paying off expenses incurred from day-to-day living. The amount of funds invested and how those funds are invested is set-out once the investment goal has been established.  Then there is the process of identifying appropriate investments based on an investment time frame and the financial goal to be achieved. Generally, most investment goals are aimed at investing money in preparation for retirement but an investment goal can also include the purchase of property, car, education etc…


There are 3 ways in which wealth creation can be undertaken and for most it is systematically investing a sum of money on a regular or periodic basis known as a Systematic Investment Plan (SIP). A Systematic Investment Plan most effective with certain types of investments as it enables an investor to place small equal amounts of money across a wide range of investments and provides the additional benefit known as Dollar-Cost-Averaging (DCA) which in effect reduces the volatility in purchase pricing by averaging out the cost of investing over time …. 

in essence removing the consideration for timing an investment.


Like all investment plans there are pros and cons and in the case of SIP’s and DCA they involve the following deliberations. As a pro it is stress free and reduces the emotional element to investing; it is a structured approach which avoid the risks associated with trying to time an investment. As a con investing in a rising investment market could be more expensive than investing a lump sum; with SIP’s and DCA it is important to ensure that the right type of investments are selected as this investment process will not compensate for poor investment selection.
Another way in which wealth creation can take place is through lump sum investing which in essence is investing all investable funds at one time. This provides immediate exposure to investment markets and assets provided market timing is not a consideration – a consideration few, if any investors, succeed at. The pros and cons of lump sum investing are simply this. With a lump sum you are investing all at once and can select your investments across a range of assets. The con is that the market could fall after the lump sum investment takes place. The caveat to lump sum investing and truly for any investing is simple and stated in an earlier article i.e. “Time In, Not Timing” that provides the best potential return.

The third way is through leveraged investing this can be done a number of different ways and is basically the use of borrowed money to increase potential returns. The borrowed monies provide a potential multiple return on the investment component that is not borrowed but at the same time the interest on the borrowed funds and the risk of a declining investment market increase the costs of investing and the risk. As can be appreciated leverage investing is a double edge sword for the following reasons. On the up side or pro to leveraged investing makes more investable monies available since only a fraction of these monies are being used and the rest represents borrowed funds this makes taking larger positions in an investment possible. This provides an advantage of investing over a range of different investment assets with a smaller initial sum and the larger borrowed amount the remainder - profits are multiplied – often many times over. The down side or con to leveraged investing is the ownership of the underlying investment is given up and if the market moves against the investment there will be a requirement to make up the difference by providing more / increasing the amount of the initial monies used to create the leveraged investment position. An important note is that potential losses are multiplied many times which makes this wealth creation strategy not suitable for long term investing.

It should be noted that this article and all articles published by Creative Coach Online are for information purposes only and should not be taken as advice. It is essential to discuss the appropriateness of any Strategy with a licensed / registered professional. For more details, please visit https://www.creativecoachonline.com/disclaimer 



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