Investing Secrets From A Wealth Manager

The Motley FoolSome years ago I was chatting with a wealth manager. Until now, I still have no idea as to why this highly-paid individual would even give me the time of day.

After all, these professionals specialise in catering to the fabulously wealthy. I do not fall into that category. They also charge a handsome fee for their services. I most definitely would not pay someone to do something that I can do perfectly well for myself.

That aside, the wealth manager was unquestionably a great conversationalist – full of wonderful stories and rich anecdotes about the fascinating world of finance. The more we chatted, the more he revealed. In fact he even told me something that, perhaps, he shouldn’t have done.

Here’s what he said.

Little and often

He told me that on one occasion, as he was leaving a client’s office, the executive’s secretary asked if he would mind doing her a simple favour.

She said that she was soon to retire after many decades of service with the multi-national corporation. During her time at the firm, she had accumulated lots of shares in the company through various schemes that included salary-linked bonuses, loyalty plans, scrip issues, bonus shares and incentive options.

However, she had no idea how much her share investments were exactly worth. So, as a favour, she wondered if he would mind giving her share portfolio a quick once-over.

The wealth manager was more than delighted to help. The next day she turned up at his office with a box of papers filed, as you would expect from an ultra-efficient secretary, in proper chronological order.

It didn’t take the wealth manager long to estimate the value her holdings. He rocked back in his chair, stroked his chin, looked her in the eye, then smiled, and said: “Madam, you are about to have the most amazing retirement – you are a millionaire“.

The secretary was astounded. But she shouldn’t have been. She had been slowly accumulating stock in a company that had been rewarding its shareholders, which included her, with a total return in excess of 10% a year.

Every little helps

A 10% annual total return might not seem like much. But a $2,500 lump sum invested 40 years ago at a 10% total annual return would have turned into over $100,000 today. What’s more, regular annual investments of $2,500 over the same period would have turned into more than $1 million.

It is easy to see how investing little and often in good companies can compound into something quite substantial over time.

It has to be said that the secretary was fortunate to be working for a solid company that had delivered dependable returns over a sustained period. These types of companies are by no means unique, though.

Here in Singapore, we have a number of blue chips that have also delivered mouth-watering returns over time.

Risk and return

Since the turn of the Millennium, no fewer than ten Straits Times Index (SGX: ^STI) companies have delivered double-digit annual total returns. They include, in no particular order, Jardine Strategic Holdings (SGX: J37), Keppel Corporation (SGX: BN4), Genting Singapore (SGX: G13) and Noble Group (SGX: N21).

A blend of these blue chips within a portfolio would have delivered above-average returns over the last 14 years. It just goes to show that it is not necessary to go to town with diversification to reduce risk and increase returns. In fact, it is reckoned that around half a portfolio’s risk can be eliminated if the number of stocks is increased from just one to 10.

I’ll leave you with a final thought this week to ponder over as you look through your portfolios.

Warren Buffett once said that if the best business you own presents the least financial risk and the most favourable long-term prospects, why would you want to put money into your 20th favourite business instead of adding money to the top choices?

With logic like that, it is easy to see why Buffett is one of the world’s wealthiest investor.

This article was first published in Take Stock Singapore.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.