13
January
2020

Creating wealth & providing income

The difference between creating wealth and providing income

Different assets have different characteristics and some are more suited than others to achieving a desired outcome.  The key to a successful investment strategy is ensuring that the asset mix is suited to achieving the desired result.

Two broad outcomes are; building wealth or providing income. There are a number of goals that fall into either of these 2 broad categories. For instance, you may wish to build wealth to purchase a house or fund retirement. Alternatively, you may require your investment to provide income in retirement or a period with higher than usual expenses or reduced income (such as starting a family).

When building a portfolio for wealth creation, we try to select assets that have growth and volatility in line with our expectations.

When building wealth, one of the most important considerations is time frame. A longer time frame allows for a higher exposure to growth assets. Growth assets, such as shares and property, have higher returns and higher volatility. The longer time frames see the overall performance of the fund trend towards the long-term average.

By far the most popular long-term wealth creation investment is an investment property. This is an extremely effective investment vehicle for those with a long-term time frame. The fact you are allowed to borrow up to 80% of the value of the investment using the property itself as security is brilliant for gearing. The tax advantages of capital gains discount is attractive, as are potential negative gearing tax deductions which help subsidise the investment. There is low price volatility particularly on the downside (although properties do fall in value) and there is a long history of capital growth.

Like all investments, there are downsides. Properties have a high degree of timing risk and are illiquid. The sit and surge nature of property growth means the timing of an investment has a much larger influence on overall return in comparison to other investments.  As long as you have the intent to hold for the long-term, these are acceptable limitations.

In income phase, the goals are different and so are the most appropriate investments. Regular income and access to funds is what is required. Investments are typically less aggressive with more focus on stability as opposed to growth.

Fixed interest investments and shares in companies that provide high dividends are appropriate options. Given that most of the return is in income, which is taxable, structuring for tax purposes is more important. If retired, the use of the superannuation system is an effective strategy, ad is investing in the name of a lower income earner.

Property is not the most appropriate investment when providing income is the primary focus and a fixed interest dominant portfolio is unlikely to efficiently build long-term wealth.  The key is selecting assets in line with your goals.

Author; Alex McKenzie Categories: Future Financial Services Blog

About the Author

Alex McKenzie

Alex McKenzie

Owner at Future Financial Services

Past:

  • Paraplanner at Zammit Partners Investments
  • Unit Trust Administrator at Colonial First State

Education

  • University of Western Sydney
  • Penrith High

About

As a Financial Planner I help people to achieve what they would like in life. This involves helping you to identify the things in life they would like , developing plans to help achieve them and strategies to protect what you already have. We do this by providing Financial Advice to guide you through your life stages.

The financial planning process involves determining a clients current situation and financial objectives and tailoring strategies to assist in best achieving those objectives.

I am an expert in superannuation, investments and insurance, these are tools we use to help you achieve your goals.

I aim to use my knowledge of superannuation, taxation and Centrelink to efficiently use your assets and income to achieve your financial goals.

Retirement and pre-retirement planning, wealth creation, asset protection, insurance planning and estate planning are all areas of advice that I provide.

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