Wealth Managing: Applicable Techniques

Up to this day, wealth acquisition still serves as human's main driving force to live their live. It is indeed one of the sensitive knots planted in human mind. Wealth acquisition motive is sometimes blamed for some people's indecent act of corruption. We don't see one or two cases of corruption worldwide, but hundreds of it as shown by the 2009 Corruption Perceptions Index. This proves that wealth acquisition has become the ultimate goal crucially chased by people.

Despite the unpleasant fact about corruption, wealth acquisition can actually be managed and good wealth acquisition management prevents people's mind from being corrupted. The discussion of wealth acquisition actually resides in the whole set of an advanced type of financial planning, wealth management. Wealth management has become a distinguished type of both financial planning and personal banking. And seeing the large number of increasing high net-worth people along with endowments, foundations, and retirement plans, wealth management has become a promising business opportunity. A specific discussion on wealth management business aspects will be presented in another article.

Wealth Management Defined
We can define wealth management as an advanced type of financial planning and investment portfolio management altogether which are conducted in a tailored basis according to each client's personal investment goal. Nowadays, as it become more popular, wealth management services is performed mainly by large banks. This is due to the fact that the banks hold custody of the most liquid assets of their clients, cash. Cash is the asset that preserves the highest potential of return or opportunity cost of usage. Since banks hold all the cash, they have the sufficient bargaining position to offer wealth management service.

Components of Wealth Management
Wealth management consists of at least two components: wealth acquisition and accumulation and wealth protection.

Wealth acquisition and accumulation is the relevant issue with regards to the beginning issue in the beginning of this article. This is because there are actually legal techniques that can be used effectively to accumulate wealth. By legal here means decent management in matters of investment management and tax management.

Investment management can be conducted properly and effectively by first defining the investment goal and time horizon. By having these two set, investment management can develop a certain matching scheme of asset placement along with its proper placement period. We can conduct wealth accumulation by choosing the right set of alternatives yielding the proper return with a certain risk set forth initially.

Tax management is the next phase that always entail investment management. What is sought after from conducting this is the balance between wealth accumulation and minimum-exposure compliance to tax regulations. We certainly don't want to be rich and chased by tax authorities at the same time.

Wealth Protection
After setting the wealth accumulation scheme, the next thing to do is creating a proper protection for the wealth itself. This is due to the fact that unprotected assets face many threats that in turn can bring potential decrease in value. In order to manage wealth protection, wealth management consider several protection tools, namely insurance (of course), hedging, and asset diversification.

We already know about insurance. As familiar as it may be, insurance still play an important role in wealth management. For the sake of wealth managing, insurance consists of general insurance, health insurance, and life insurance. Shortly speaking, general insurance deals mostly with the aspect of our physical assets, health insurance mostly deals with medical care and potential disabilities, and life insurance takes a longer and broader scheme since it deals with our life, which consists of endowment, financial annuities, and a combination of insurance and investment or commonly termed as unit link. One to bear in mind, insurance that protects our life is indeed protecting our wealth since wealth can only be relevant if we live well.

If we conduct our precautions well in terms of creating a good insurance plan, we can move to the next aspect in wealth protection: putting a safety net for our financial assets, and that is hedging. Hedging means putting safety nets around our assets, mainly financial assets. Hedging plays an important role in financial assets since making money through such assets are both potential for high return and high risk at the same time. We can use tools of hedging, like taking contracts in forms of futures, forward, or option to safeguard the future value of our financial assets.

In discussing hedging as a mean of financial protection, please bear in mind that our perspective should always lay on the side of wealth protection, not investment. Don't be confused with hedge fund, because hedge fund puts forth an investment perspective. You can see more on the discussion about hedge fund on my other article.

Finally, wealth protecting action is concluded with asset diversification. In this matter, we minimize potential risks at the very beginning, at the source of our investment portfolio. Put it simply, asset diversification is about developing a proper combination of assets. We have to mix a good proportion of financial assets and physical assets. Not only that, the asset composition in each group should also be diversified in terms of geographical distribution. A good diversification is one that gives a optimum return in a given state of risk or one that holds the minimum risk for a certain rate of return.

You may be confused, where is the protection aspect in diversification? Would it be more proper if diversification is put in investment strategy building phase? The answer is stated above, that diversifying our assets allows us to put potential risks to a minimum. That's an act of protection. Making a certain amount of effort to associate minimum risk is done in order to expect low risk. Again, that's an act of protection which is done at the very source of wealth management.

Intriguing Business Potential
As described above, wealth management is highly relevant for everyone, since everyone needs wealth to live. When every government in the world hope to have a growing economy, wealth management business opportunity follows behind since growing economy means growing wealth for the people. Consider yourself, if you are able to perform the techniques in wealth managing you will see your market immediately. I'll discuss more about the business opportunity and model in another article.

(Images source: www.mamwealth.com and valvonac.com).

Hedge Fund at A Glance

Have you ever done capital market and financial investments? Well if you haven't, then you might want to consider of doing it because of the earning potential that is so huge. Many people in the financial market conduct their investment in a fund pool mechanism. This is to administer the high required amount of funds in order to perform good financial investment portfolio. There are financial institutions that provide this fund pool for collective investments. The name for their product is mutual fund.

As interesting as they become, mutual funds are growing into sub types. The purpose of this segregation is to be able to manage the investment better by matching the return expectation and the whole investment goal. Three fundamental types of mutual fund are Equity Fund, Fixed Income Fund and Money Market Fund. Some minor variety expands from this fundamental types, namely the Mixed or Balanced Fund. This means a mutual fund that mixes the variety of alternatives provided in the all three of fundamental funds.

But there is one expansion that stands out, hedge funds. This youngest brother in the mutual funds family is very popular since it preserves the best of mutual funds quality but with a much higher returns. We'll see what a hedge fund is and how it can generate such a high return for its investors.

Hedge Fund Defined
What's a hedge fund? Suffice it to say, it's a profit hunting mechanism. The mechanism that is nestled in a vehicle or scheme of mutual fund-type of fund pool. So if you imagine what a hedge fund is, then imagine what a mutual fund is like. Any differences? Yes, of course. For one thing, hedge fund is unregulated. That is to say, it's able to perform both short and long strategy, something that a regular mutual fund is not yet to take as a strategy based on a regulating law.

Another unregulated aspect of hedge fund mechanism is the fact that it is able to perform very speculative actions in order to hunt down any profits possible from various tradings and derivatives, may it be contract-based profits or spread profits. Point is, flexibility appears as a very dense quality in performing hedge fund management.

For investors, playing in hedge fund requires a large amount of money. This is possibly designed as a way to provide sufficient capacity for the entire risk exposures of the overall funds. One thing to remember, is that hedge fund preserves the tendency of exclusiveness. A single hedge fund participation is limited to several investors only. This is one of the difference with regular mutual funds, the number of investors participating is very numerous, can be up to hundreds while in hedge funds the number is very fewer and limited. But from these limited number of participating investors are gathered a very large amount of money to be invested.

Naming
The naming is also interesting. Hedge Fund. What to hedge? Why do they conduct hedging if indeed that's what they do? Well, the name was indeed confusing for the first time. My first impression is that this type of fund takes advantage from asset or liabilities hedging in order to gain profits. How is that even making a profitable sense?

It turns out, the initiation of hedge fund is to hedge a bear market. Since hedging attempts are done through various contracts and derivative involvements, this type of fund grew into a specific purpose: hunting profits from hedging vehicles. In turn, this also grew into involving not only hedging vehicles but also other forms, or probably all forms, of financial arrangements. For this strategy, hedge fund can no longer taken into account simply as a fund pool to hedge risk. In fact, hedge fund possibly bear a much greater risk than the market itself. So we can see why hedge fund is not like how it sounds.

Pros and Cons
Hedge fund is really popular due to the fact that its potential to gain a much greater return with a much greater risk exposures. It is the riches' favorite. The performance can also reasonably hoped for since hedge fund requires investment manager with high professional reputation. In the US, hedge fund managers must hold a proper accreditation. Along with the aggressive strategies, well accredited managers bring a rational hope for investors of a good investment performance.

But from the macroeconomic perspective, the existence of aggressive speculations carried out by hedge fund practices may endanger the economy through the possible rising of inflation rate. Financial speculation will create money concentration in financial market, thanks to predetermined return and contract mechanisms that can literally create more money. If this is conducted in a large amount of money, and thus the more amount it creates, then there will be a state where money supply is greater than goods and services supply due to less money invested in real sector. This is the irony, on one side hedge fund creates prosperity for its investors, while on the other hand the intense speculative practices it conducts shrink the real sector, making it smaller than it should be compared to the large amount of money available.

This is probably the time for us to rethink about the best way of conducting financial investments. Figure out how to make a decent balance between financial and real sector and the investment gain can become a true prosperity.

What are your thoughts?

(Image sources: 4.bp.blogspot.com, www.onlineinvestingai.com, static.howstuffworks.com).

Dubai World Shocks The Whole World

The default indication of Dubai World (DW) brings a shocking effect to the worldwide financial sector. This condition may trigger some other financial chaos in several active financial and investment markets in the world. Several hours ago, the Europe market was the first one that felt this uncomfortable bump. And now, approximately 6 hours after the announcement of the disastrous default, it's Asia's turn to feel the shocking bump in its financial climate. This could be an early warning to something bigger and should be taken quite a serious attention.

Who's Dubai World?
Suffice it to say, DW is the locomotive for the vast development of Dubai. It is practically an investment company that works for the interest of the Dubai government. It holds quite a significant portfolio of business and projects which covers literally the whole world. It holds an extensive property investments in the US, UK and South Africa. From foreign perspective, DW controls the so called sovereign wealth fund, defined as an investment fund owned by a government of a state. So we can imagine it as an investment company owned by the government of Dubai.

DW holds quite a significant influence for the financial markets, and real sector in turn, in countries where its investment lays deep and abundant. The reason for this condition is that the investment has become some kind of a foundation for forming the economic movement in the economy it resides in. Once it has given itself a steady position, the investment owner has the soft control to trigger a stroke toward the financial market. As we all know, financial sector has a unique role in controlling the economy since it literally moves the market based on rumors that often creates critical decisions arise from business practitioners in the real sector. That way, we can see how a tiny itch on the chairman's shoulder, or even a change in his mood may cause the economy in some other part of the world scream in panic.

Potential Crisis
The announcement made by the the authorities of Dubai on Wednesday, November 25, 2009, that it would try to find alternatives in rescheduling its sovereign wealth fund held by DW has clearly indicated something bigger. This is due to the fact that at least two of DW's prominent subsidiaries have liabilities that have been nearly due in payment. The two are Nakheel (USD 3.5 billion, due on December 14, 2009) and Limitless (USD 1.2 billion, due on March 31, 2010). DW proposed for a rescheduling for at least up to March 30, 2010. Three-month reschedule is certainly itchy for an institution with a huge resource like DW.

If, in some ways, there are too many who place their investment in DW's debt, this rescheduling announcement can be seen as a short performance made by the institution. And the fact is showing that there are indeed many who placed their investment there. We can see how the Europe, followed by Asian market, reacted to this situation. The latest is the downturn in most of the Asian markets:

1. Hang Seng slipped low for 7.1% to 21,134.90,
2. the S&P/ASX was down for 2.9% to 4,572.1,
3. the Shanghai composite turned low for 2.36% to 3,096.27,
4. KOSPI fell 4.96% to 1,524.50,
5. the Taipei index 3.21% to 7,490.91 and
6. the Thailand index and the Philippine index both were down for 0.78% to 680.37 and 1.45% to 3,044.97.

First came Europe, then Asia. It's probably too obvious to miss that this needs to be taken a serious concern. The rational reaction for this condition is mostly conservative, setting loose all high risk assets since there is a probability that this may have some links to other potential default. After all, DW funds are too sweet a candy to miss for treatment as an underlying foundation for various derivatives. You can imagine how complex it may be. Therefore, avoiding any multiplier effect is probably the right thing to do.

Positive Hope
Regardless of this storm indication, there is indeed some hope that worldwide investors can rely on. Dubai is part of the Emirates, which consists of more than one wealthy Arab nations. The riches among those states will only too happy to save DW and therefore provide new safety net for worldwide investors, including all the related derivatives. This default announcement and the effect it creates on major markets in the world must already be spotted on investors sensing for quite some time. Hoping for positive thinking, I think there may be some help left for DW. Let's be positive enough that help is on the way.

(Pictures source: www.nazret.com, www.atlasshrugs2000.typepad.com, www.eastasiaforum.org).