Research has shown that 9 out of 10 families loses all wealth by the 3rd Generation.
Multiple reasons assigned to it are :
1. Poor investment choices
2. Prolonged period of high inflation during a particular time horizon
3. Higher taxes
4. Higher spending by the younger generation in the family
5. Family extension over a period of time.
6. Protracted Legal battles between family members

One of the simple ways to help transfer, build and preserve the family’s wealth is creating ‘Multiple Portfolios’ for you and your family.

The first step towards creating multiple portfolios is to identify you and your spouse’s needs to cover your personal life style expenses.
This would be the core portfolio that needs to be created to withstand all market conditions and last through your life time. One may also add an emergency reserve fund to cushion the portfolio during extreme events that could last for many years.
The core portfolio would be the corner stone for all planning purposes, since it would give you and your spouse the financial security during your life time. The Allocation for this core portfolio would be a conservative one skewed towards liquid and traditional asset classes. This amount would need to be always there in the estate.

The second step would be to identify goals for your children, grand children, others in the family and philanthropy. This would form a set of satellite portfolios that would have to be created to meet the respective goals.
Based on the time frame of the goals and risk profile of the individual family member, the portfolios could be conservative, balanced or aggressive.
For instance, children and other family members’ regular expenses could have a conservative portfolio, whereas their education and other goals could be a balanced or aggressive portfolio depending on the time horizon to reach their goals.

It is crucial to identify the timing of the transfer of the satellite portfolio’s capital from the core portfolio and develop strategies to move it.

The sound cash flow management and clear investment strategies helps to meet expenses on a regular basis as well as to fulfill the many aspirations of the family members . At this stage, it is equally important to establish appropriate wills/trusts to transfer assets at the right time that reduces large tax out flows for your family members.

The third step is to implement investment strategies for both core & satellite portfolio, monitor and actively manage it.

Many Indian families have their wealth tied into the business. It is important to create ‘liquidity’ and carve out assets to meet the financial goals of the families. We believe, if the wealth transfer and estate planning strategies are planned and implemented early on, there is a fair chance to retain wealth for multiple generations.

In September 2008 the failure of investment bank Lehman Brothers set off a negative domino effect across various asset classes with the exception of US Treasury Bonds and Cash. The bedrock on which Asset Allocation rests – different asset classes perform differently at various times in an economic cycle was undermined. This meant that conventional Asset Allocation also had to include some form of insurance which was guaranteed to perform well in a market crisis.This could have been in the form of deep out of the money put options on the stock market benchmarks which would have protected investors from the severe losses they experienced (similar to protecting another valuable asset – an automobile).

Investors must also focus on moving from a framework of Static Asset Allocation (i.e predetermined allocation percentages across asset classes) to Dynamic Asset Allocation. This would involve setting a wide range for Asset Allocation to particular Asset Classes with some form of valuation/ economic cycle based method to move to the lower or higher end of the range. For example if it were determined that an investor needs to maintain a 60 percent allocation to Equity, on the basis of where the market was trading on a historical valuation basis, Equity Allocation would be higher at 70 percent (if the market were trading at low valuations) or 40 percent (if the market were trading  at high valuations).

The third update on Asset Allocation would be to also evaluate concentration of Assets in particular sub- asset classes and make changes in these exposures to reduce portfolio risk. To follow up on the previous example this would be akin to reducing investments in Banks or Financial Services companies when there is an increased likelihood of an economic recession with a commensurate increase in investments in defensive FMCG companies. In Debt Asset Allocation this is akin to reducing investments in corporate bonds and increasing investments in Government securities on expectations of an economic slowdown.

To conclude while the market crisis of 2008-09 has prompted a review of Asset Allocation, we believe it still works in an updated form.