Take disciplined approach to building wealth for long term

WE WOULD like to get rich quickly, and it is tempting to trade frequently in volatile investments in the hope of making large gains.

Experience, however, teaches that a well-disciplined and measured approach to building wealth is far more likely to produce good results in the long term.

Most people have more success in growing and preserving their wealth by clearly identifying their financial goals and then meeting these goals through a well-considered and carefully monitored portfolio of investments that grows steadily over time.

Long-term investment reduces risk. One way of assessing the risk of an investment is to measure its 'volatility', which is how much its price fluctuates around the long-term average.

By holding for a long time, your returns are likely to be less volatile and closer to the long-term average.

Different types of asset have different levels of volatility. Cash has very low volatility, bonds are a little more volatile, while equities have a much higher volatility.

A key investment concept is 'asset allocation'. This simply means looking at your wealth as a whole - as one big pot - and deciding how to apportion it to achieve the best overall return at an acceptable level of risk.

Focusing on the performance of individual investments is less important than monitoring the overall return of your portfolio.

Different asset classes, for example stocks and bonds, tend to have a low correlation with one another, which means that their performance is not closely linked.

If you have many investments, you will see that their individual performance varies widely from year to year.

Sometimes, equities, say, will be performing badly while bonds are performing well, and at other times the situation may be reversed.

The main aim of asset allocation is to spread your investments across asset classes that have a low correlation in order to reduce the volatility of your overall returns.

A balance of investments with low correlation makes your overall return each year steadier and more predictable.

Adapted from Leo Gough's book, The Citibank Guide To Building Personal Wealth, published by John Wiley & Sons (Asia).