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Ancient traders and billionaires – What lessons can we learn?

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Financial Planning is all about outcomes.

Should you seek expert counsel from a CERTIFIED FINANCIAL PLANNER® professional, you will have access to a skilled practitioner with knowledge of many different strategies for a whole range of different circumstances. The common thread between each strategy is that it is simply a mechanism to achieve a particular outcome with the greatest degree of confidence, certainty and control.

The secret to achieving the outcome of a secure financial future is to have a financial plan in place, with two key components. You need a plan to ‘grow your wealth’ and you need a plan to ‘protect your wealth’. Too often investors spend most (if not all) of their focus on the former to the detriment of the latter.

Wealth protection is about transferring or distributing known risk, and risk is defined as the probability of not achieving a known outcome. This concept was understood and practiced by ancient Chinese and Babylonian traders in the 3rd and 2nd millennia BC, respectively. They would ‘hedge’ their risk when travelling treacherous river rapids by distributing their wares across many vessels to limit the loss due to any single vessel capsizing.

In modern times this is practiced through asset class diversification within an investment portfolio, but what about your overall wealth trajectory?

The world’s best wealth accumulation strategy is worthless if you don’t have a complementary wealth protection strategy to lock in your wealth trajectory. As the diagram below illustrates, your wealth trajectory can come crashing down should you not have these two complementary strategies in place.

Risk management strategies can include the use of appropriately structured life and income insurance, and appropriate legal documentation should something happen to your health (life or capacity) or family situation.

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For many Australians, their biggest asset is their ability to get out of bed and earn an income. The ‘present value’ of their average income over the course of their working life could be as high as a few million dollars – much higher than their house, super fund, car and contents. And the good news is that income protection insurance is tax deductible!

It is a smart move to take out life and income insurance while you are young and healthy, but it is an even smarter move to recognise that you still need appropriate legal documentation in place while you are still in the early stages of accumulating assets.

But what about Billionaires? The case for appropriate legal documentation is clear and paramount, but what about life insurance given their enormous wealth?

Last year an unnamed Silicon Valley billionaire set a world record for the biggest life insurance policy at $201 million (USD). Why would someone with so much wealth require addition insurance? Well, in California there are still death taxes and if you are seeking to distribute a particular asset to a particular beneficiary (i.e. control of a company) there needs to be sufficient ‘liquidity’ in the estate to cover the tax bill without having to sell down assets (and potentially control).

While Australia has done away with death duties (except for superannuation death benefits in some circumstances) the same principle still applies here. It is all about protecting outcomes, no matter where you sit on the wealth spectrum.

While life never follows a single or straight path, you still want to ensure that the different routes will still lead you towards your desired outcome with the greatest degree of confidence, certainty and control. As the old adage goes, prevention really is better (and cheaper) than cure, so start your wealth protection planning today.

Adrian Hanrahan CFP®
Big Sky Financial Planning



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