The Essence of Wealth Management

Wealth management is a lifelong task. Either you are an individual investor or a professional asset manager, the central goal is to steadily increase your wealth through proper management of capital. Personally, I think there are two keys to successful wealth management: diversification and customization.

Diversification for Capital Growth

Every single investor has to face a certain level of risk when investing in the capital markets, ranging from bonds and equities to derivatives. Diversification can be effective in optimizing the risk-return payoff through well-structured asset allocation. Simply speaking, investing in asset classes with alike market performance could lead to huge reward, or huge loss as well. Comparatively, the exposure to diverse assets with different or even opposite performance is therefore a great hedging strategy, leading to stable investment return in the mid- to long-run.

Customization for the Best Allocation

After knowing the importance of diversification, we still have to face a quantitative issue of “what is the percentage of each asset class in a diversified portfolio?”, which has to do with customization.

As said in the book “A Random Walk Down Wall Street”, the risks you can afford to take depend on your total financial situation, including the types and sources of your income exclusive of investment income. Your earning ability outside your investments, and thus your capacity for risk, is usually related to your age.

Therefore, there is not a “best” portfolio for everyone. A responsible asset manager has to develop the investment decision for a particular client based on the well-rounded mastery of his/her financial situation and beyond.

Personally, I interned at AIA Hong Kong office as a financial planner last summer. One of the tasks I accomplished was “financial health check interview”. The goal of the interview was to understand the financial status of clients and ensure their benefits from total protection. In the fact-finding stage of the interview, I collected financial facts, including income level, family expenses, aggregate debt, and investment style, as well as non-financial facts, including age, family status, diagnosed illnesses, smoking & drinking habits. The integration of all these facts would offer a strong fundamental for the execution of a tailor-made financial solution spanning insurance, savings, and investment.

In conclusion, a truly diversified portfolio is not the result of a random selection from various asset classes in the market. Instead, it is derived from in-depth analysis of their features and correlations, as well as the client’s earning power and risk appetite.

One thought on “The Essence of Wealth Management

  1. jhchamot

    Nice post. I will be doing an internship in Wealth Management this summer and this analysis all seems very accurate. Interesting to hear that you collected information about health and drinking habits. Makes sense too.

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