It's incredible to think that Saudi Arabia is planning to grow its sovereign wealth fund to more than US$2 trillion.
I struggle to visualise so many zeros, but to give it some context the S&P/ASX 200 (INDEX ASX: XJO) has a market capitalisation of roughly US$1.1 trillion (AU$1.5 trillion), while the London Stock Exchange is around US$3.3 trillion.
There are a few fascinating points to the whole thing.
One is that a big chunk of the value will come from transferring ownership of the Saudi Arabian oil company Aramco to the fund. Another is simply the fact that at US$2 trillion it would become the largest sovereign wealth fund in the world and will slowly help to break the chains of oil (which currently shackle Saudi Arabia's GDP) as the fund begins to diversify.
But it's the concept of a sovereign wealth fund itself which I think holds a lot of value for us as individual investors. Because if we are serious about growing wealth for ourselves and our families we should treat our portfolios as if we are running our own personal sovereign wealth funds.
Like investors, every nation has a slightly different mandate for their fund. For both Australia and New Zealand that objective is to fund future liabilities like retirement pensions, but some countries aim to fund infrastructure or even stabilise exchange rates (Russia).
What is common though, is that they have a clear vision of what the wealth will be used for, and a strong idea of when it will be needed.
When it comes to our own portfolios, there are some important lessons to be taken from this thinking which can help us plan for our own investing success:
1. Identify your own investing mandate
Do you need to live off your investments when you retire, or are you building an empire of wealth to protect your family for decades to come?
2. Remember your time horizon
Like a tree, money needs to time to grow and reproduce through compounding. If you will be retiring in the next 10 years, your focus on strong, cash-generating companies like CSL Limited (ASX: CSL) or Telstra Corporation Ltd (ASX: TLS) is likely to be much higher than a Millennial who may prefer the growth potential (and added risk) of XERO FPO NZX (ASX: XRO) or Freelancer Ltd (ASX: FLN).
3. Diversify
The plummeting oil price and shift to cleaner energy sources has been a rude shock for Saudi Arabia. It was heavily leveraged to the commodity. The diversified nature of sovereign funds means less overall volatility and potentially higher risk adjusted returns, reducing the chance of a total, unexpected wipe-out.
