13th May 2009

Dear Investor,

Are the rich really different?

Dr Doug Turek, Managing Director of Professional Wealth and founder of Wealth Benchmarks, has recently released a report for financial institutions that examines the question – are the rich really different? In this Investment News, we look at some of his conclusions. For more information, visit his website www.wealthbenchmarks.com.au

Time is the most important driver of wealth

Dr Turek's first conclusion is that time is the most important driver of wealth. Successful people create a 'virtuous' wealth-building circle of earning, saving and investing and reinvesting. On average the net worth of our wealthy Australians grows about 6% each year, based on income and savings alone (excluding capital growth of investments). Net worth is the value of all assets less debt.

The typical member of this group – 'the rich', which coincidentally shares the same average net worth of the top 20% of all Australians, becomes a millionaire at age 40 and a double-millionaire at age 55. For our (aspiring) wealthy group, between the ages of 30 and 60, wealth increases at $60,000 and $80,000 a year.

Time is the most important driver because time is needed for savings to accumulate and investments to compound. It is quite hard for a 30-year-old to break out and become ultra-wealthy at that age (although not impossible particularly for business entrepreneurs). By age 50, a much wider band separates out those who have been prudent spenders, regular savers and investors from those who have not. After this age, wealth either continues to grow, plateaus or declines. It all depends if you are still working and how fast your assets are growing versus what you spend. Of particular relevance is the reward for being a long-term share investor.

The role of income

Next in the hierarchy of important wealth drivers is earned income. Perhaps not surprising this is a secondary effect and we observe that wealth doesn't step up for all unless gross income rises above $200,000 a year. Below this amount, high levels of expenditure mean many fail to take advantage of their moderately high income to build wealth. But income by itself is not the main driver. It is the relationship between income and expenditure that is vital. No matter how much you earn, if you spend more than you earn, wealth accumulation will prove to be difficult.

Investment pathways

Other factors apart from age and income drive financial freedom or impact it. For example, a marital separation knocks off on average 20% of lifetime wealth, and serious illness that impacts on earning capacity will have a serious effect on the accumulation of wealth. The size of your family also has an impact – private school fees can have a serious impact on wealth accumulation.

Investing

Asset allocation is a significant driver of investment return. Overall, the wealthy are growth investors, clustered into four groups (in order of equity or growth like investment focus):

  • Cash only investors (small but nevertheless significant)
  • Property rich investors (property is classified as 50:50     growth/income)
  • Traditional diversified growth investors (peak have 75% of     growth assets)
  • All share or business equity investors (equal in size to all     cash investors)
  • Knowing the right asset allocation for you and managing your portfolio to this target is a critically important investment discipline. Dr Turek is of the view that too many Australian investors neglect this fundamental point and focus instead on tactically or ad hoc accumulating shares and other investments.

    As noted there are many different pathways to creating and enjoying wealth. Just like for companies, benchmarks along the journey can help people and professional advisors check their progress and identify opportunities for improvement.

    At La Trobe, we aim to offer investment products that can help investors grow their wealth, and as we say, "our core purpose is to improve people's lives by helping them to invest to achieve financial security".


    Best regards,
    Chris Andrews

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    Chris Andrews
    Head of Funds Management

    t  +61 3 8610 2811
    e  candrews@latrobefinancial.com.au

    Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
    Read full profile here.










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