The Right Strategy For Preserving Wealth

Many investors today fail to anticipate or prepare for wealth preservation. Focusing solely on wealth accumulation without preservation could lead to loss of wealth. This month, CIMB Private Banking enlightens readers on what wealth preservation is and the appropriate strategy to adopt.

THE concept of wealth preservation is not new. However, it is not widely adopted even by the most sophisticated individuals or investors.

Wealth preservation generally means keeping the value of one’s investment assets. An effective wealth preservation plan considers not just how to keep control of the assets, but also how to keep the asset value – taking into account inflation – in order to maintain the total wealth of an investor in real terms.

Wealth preservation is very much of concern today for it plays a vital role in the protection of personal assets, whether for the purpose of living off those assets during retirement years or passing them on to heirs.

In this third cycle of wealth, the main objective is to achieve a suitable return without putting undue risk to one’s investment assets and to adopt a more conservative investment strategy.

Here, protection of one’s wealth becomes more important than growing it. An investor generally becomes conservative in assuming capital risk, seeks regular income from his investment and, in some cases, aims for moderate growth from the investment.

When should an investor adopt wealth preservation?

Knowing when to adopt wealth preservation is important as failure to do so could result in taking on inappropriate level of capital risk. This could lead to putting one’s entire life goals, such as retirement plan, children’s education fund and wealth for the next generation, in jeopardy.



Any major losses to an investment would make it hard for an investor to re-build his wealth. As such, the process of wealth preservation should commence when an investor’s income or wealth-generation capacity decreases due to age.

Here’s an example. The table above shows the portfolio of an investor where the higher the losses he suffered, the longer and more difficult it would take for him to contribute to the portfolio to recover the losses.

In the case of a 40% loss on a portfolio sum of RM5mil and based on RM500,000 annual contribution to the portfolio, it would take the investor four years to recover the loss.

This may be difficult to achieve if the investor no longer has the earning capacity to contribute to the portfolio, unless the portfolio earns a higher return the following year and yields the required RM300,000 return.

In addition, the required return now increases up to 10%. This may be difficult to execute as the investor, under the wealth preservation cycle, may not be in a position to take on more capital risk. More often than not, investors who experience this would end up having to downgrade their investment and life goals.

The wealth preservation strategy



Before adopting a wealth preservation strategy, an investor needs to assess or review his present investment portfolio to reflect his risk tolerance and long-term investment goals.

When an investor switches to a preservation mode, wealth protection becomes more important than growing wealth. The investor generally becomes conservative in assuming capital risk and is seeking regular income from his investment asset instead, although in some cases, the investor may still be looking for moderate growth in his investment.

As a rule of thumb, an investor should aim for a return volatility as well as a prospective return of no more than 10% per annum and this is because as mentioned, investors should not expose themselves to undue risk in their wealth preservation strategy.

To achieve this, the portfolio would be fixed-income biased, with fixed-income type investments comprising 75% to 100% of the portfolio. At the same time, growth type investments could consist of up to 25% of the portfolio. A sample of these investments is shown in the table above (right).

Wealth preservation strategy allows an investor to determine whether there is sufficient wealth to fulfil all of the investor’s life goals. For example, the investor needs to consider how much wealth is sufficient for his retirement or the amount of wealth that he wants to leave behind for his heirs.

After determining this, an investor would need to look into protecting and planning the distribution of his assets. Part of the wealth preservation strategy includes adopting life insurance to protect oneself and the family, and having a will or a trust, and a tax plan.

Trust in wealth preservation, for example, is important because it is a tool that could help protect assets from creditors or from a long-drawn court probate process when distributing the assets to heirs. The vehicle also ensures that the wealth is managed and distributed according to one’s wishes.

Another is to put in place a comprehensive tax plan as it could maximise tax saving and avoid it affecting the investor’s portfolio income. Without a proper tax planning structure in place, taxes could cause an investor's income level to be lower than anticipated.

One of the simplest ways is to keep fixed deposit amounts below RM100,000 as this could save the investor withholding tax on the interest. In addition, individuals investing in fixed income instruments could create a stream of tax-exempt income. The next article will cover tax-planning strategy for high net-worth individuals in greater detail.

In conclusion, every investor should know when and how to preserve and protect his wealth in order to achieve his investment objectives.

Reducing risk to investment capital, aiming for a reasonable level of returns that take into account inflation and investment objectives, protecting wealth through a trust and minimising taxes are all crucial elements to consider in preserving wealth.