A highly respected financial analyst once suggested if over a 20-30 year period I was able to achieve a client’s lifestyle objectives (in financial terms), while maintaining a 1% return on their capital, ahead of inflation and tax, the client should be well satisfied.
My reaction was of amazement. However, over the years I have thought a lot about my colleague’s prognosis and have come to appreciate and understand his wisdom.

The “Settlor” of the Rothschild Family Trust, one of the oldest, largest and most successful Family Trusts in the world, has exactly the same performance expectation of its Trustees. In essence, they are able to assist or distribute to the Trust beneficiaries annual income and growth, provided before doing so they retain as capital an amount equal to the annual inflation rate plus 1%.

Is there something all of us could learn from this very simple principle? Imagine making yourself accountable to grow your capital by about 4%, (i.e. the current annual NZ inflation rate as per the Reserve Bank statistics, plus 1%), before you considered any personal expenditure. This would mean, at a marginal tax rate of 28% you would be required to return 5.56%, before any personal expenditure could be made. This would maintain your capital’s purchasing power ahead of inflation, plus retain 1% growth for a rainy day – for those times when life throws at us the unexpected. If, in addition, you imposed a personal mandate upon yourself, which required you to make up any one year’s shortfall, in the following year, you would no doubt become very aware of each investment asset’s potential to perform over the longer term.

What impact would this have on the manner in which you choose to invest? From a financial planning point of view there are several pertinent points or questions raised here. What capital base will you require to provide your annual expenditure requirements in inflation adjusted terms? i.e. In today’s dollars into the future.

• How do you plan to get to that point whether it is now or in the future? A good rate of interest will only last the term of the investment.

• What happens if interest rates drop just when your investment matures?

• What timeframe do you consider necessary to plan for, as this should very much affect the investment avenues you choose.

• Never invest until you fully understand what you are getting yourself in to-research and have all your questions fully answered.

• Diversify over asset classes, industry types, management styles and geographical locations.

• PLAN AND PLAN TO WIN!

Source: David Solomon, Director, New Zealand Financial Planning
Telephone: (03) 375 4040 Email: davids@chchnzfp.co.nz
“A Disclosure Statement under the Securities Markets Act 1988 relating to the financial adviser associated with this article is available on request and free of charge.”

 Copyright © The Main Report Group