Growth assets critical to wealth accumulation

Nirdev Desai, Head of Sales at PSG Wealth

From a life expectancy perspective, there has never been a better time to be alive, as the average life expectancy continues to increase steadily in both developed and developing markets.

Living longer, coupled with instant gratification, growing consumerism and credit extensions becoming more easily accessible, is however resulting in a shrinking pool of available capital for the average South African to draw on during traditional non-income earning periods such as retirement or retrenchment.

This is according to Nirdev Desai, Head of Sales at PSG Wealth, who says investors, therefore, need to carefully balance their lifetime of earning ability, and that more time exposed to growth assets will unleash the full effect of compound growth. This presents the opportunity to build significant intergenerational wealth and can be harnessed within this shifting world.

An investment plan that will stand the test of time needs time

He explains that investments need to have exposure to growth assets to address / counter inflation. “Growth assets – like listed equities – are the best way to achieve inflation-beating returns. However, they require time, with a typical minimum recommended period of ten years.”

A robust holistic financial plan traditionally allocates a component of the plan towards growth assets, but investor behaviour often detracts from these growth assets’ ability to deliver their expected returns. Desai says that examples of this are when fund changes are made to similar types of investment strategies or when investors sell out of markets at the worst possible times. “Despite having more information at their fingertips, investors’ biases often result in actions that cause damage to otherwise well-structured plans.

“Economic and market-linked crisis events tend to cloud investors’ judgment. To minimise panic surrounding paper losses on growth assets, investors should ensure that they use the services of an accredited financial planner to co-craft and implement a holistic financial plan that also caters to other goals they may have (like sabbaticals) and curveballs that life may throw at them (including retrenchment, divorce, or additional dependants).”
By considering the investment plan in its totality, and ensuring that other needs are met, growth assets will be best placed to reliably achieve the returns expected of them, within an appropriate time frame.

Have clear intent of your legacy

Unpacking the legacy that an individual would like to leave and ensuring there is clarity and efficiency on transitioning this legacy when the time comes, requires a clear plan that incorporates estate, tax, and investment planning at the very minimum, says Desai.

“Further, it is crucial that your intended legacy be understood, as every individual has a personal relationship with money. The latest research has shown that the way children are raised heavily influences their relationship with money, so it is advisable to instill healthy habits in your children that will enable them to continue your financial legacy in a sustainable way.”

While many investors believe that, when they pass away, inheritances and legacies make consoling gifts (and thus leave the details of their estate as a surprise), many financial planners prefer to include future beneficiaries in planning reviews to ensure that a consistent and clear message is delivered and agreed to before this wealth is transitioned.

Is it only for the wealthy?

He explains that an estate below the current R3.5m abatement level may not seem like much, and if instant gratification were to get the better of such assets, they might soon disappear into consumption goods with declining value.

“However, with a clear plan to build a sustainable intergenerational wealth (and minimising any withdrawals), an investment amount of R3.5m will grow into a substantial sum if given enough time.”

The table below shows how R3.5m invested into the JSE FTSE ALSI 25 years ago would have grown, with and without taking dividends. Even if an individual were living off the dividends as illustrated below, they would be what is considered a ‘high net worth individual’ (commonly defined as an individual with liquid assets of at least USD 1 million).

Source: Morningstar

Creating such a legacy will require buy-in, says Desai. “Enlist the services of a trusted financial planner to assist in defining the intent of legacy assets. This, combined with values and relationships with money nurtured in beneficiaries, will go a long way to creating substantial intergenerational wealth,” he concludes.