Drive, talent, commitment – each is undoubtedly a key ingredient of business success. But entrepreneurs focusing solely on their business run the risk of overlooking another proven element of success. Even when business is booming, it pays to be mindful of the golden rule of investing – diversification.
The good news is that with some simple strategies, building personal wealth across a range of assets can be far easier, and potentially just as rewarding, as building your own business. A lack of investments beyond the family home and business is a common pitfall shared by many owners of small to medium enterprises (SMEs).
“In the SME space, business principals predominantly reinvest in their business – there is often very little in personal investments,” explains Angela Mentis, NAB’s General Manager – Specialised Investments.
“It’s often not until people are confident in their business and have time to think about the longer term that they start to consider other means of building wealth.
“It’s essential for proprietors to distinguish between business investment and personal investment – and for owners to consider wealth creation beyond their business,” she emphasises.
Building personal wealth is not just about diversifying. Tax management is a key objective for SMEs, and many investment solutions offer an element of tax effectiveness. Importantly, business owners who are canvassing their wealth-building options and tax strategies should seek the expert advice of a financial planner who can help them evaluate their individual circumstances.
A MATTER OF CHOICE
The process of personal wealth creation typically involves a two-pronged approach: deciding what to invest in, and how to invest.
“Lifestyle stages will dictate the appropriate investment mix, though for time-poor SMEs, who are primarily focusing on their business needs, the guidance of an experienced financial advisor is valuable,” Mentis emphasises.
On the score of what to invest in, Australia’s preferences have changed significantly over the last 10 to fifteen years. We have become home to one of the most dynamic and sophisticated financial markets in the world, with the largest investment funds asset pool in the Asia-Pacific and the fourth largest globally. Investors have responded to these developments – becoming more sophisticated and moving beyond conservative, low-return investment options.
“Fifteen years ago, deposits and bonds accounted for 40 per cent of total household wealth. These days, they account for less than 26 per cent, with super comprising 55 per cent, and shares accounting for 19 per cent of household financial wealth,” notes Mentis.
Our increasing appetite for shares is testimony to the pluses of this asset class. Australia’s system of dividend imputation, together with capital gains tax discounts on shares held for more than 12 months, make equities a very tax-friendly option. And though the Australian sharemarket is currently charting a course through turbulent waters, the S&P/ASX 200 – the sharemarket’s leading index – has delivered respectable returns averaging 19 per cent annually over the last five years to the end of June 2007.
Despite the advantages of shares, Australians also have a passion for bricks and mortar.
“Many SMEs have an investment property or own the building from which they operate,” observes Mentis.
While direct property is a proven long-term investment, it does present downsides, including poor liquidity, high upfront costs and ongoing maintenance requirements. An alternate option is an investment in property trusts, which she says, “can deliver on both regular yield plus capital growth”.
Of course, the abundance of investment funds available means investing isn’t an either/or proposition. These funds give investors access to a broad range of investments, with the option to focus on a particular asset class or a wider investment across a diverse selection of markets.
Moreover, investments don’t have to be home-grown. A plethora of funds offer the chance to tap into international investments, adding an extra layer of diversification to a personal portfolio. Mentis notes that clients’ investment requirements are changing as they become more aware of global issues and opportunities. The latest IBW Global Aspirations Study reveals the top one-third of Australian SMEs are engaged in global expansion and with this global outlook comes heightened awareness of global themes.
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