Having wealth is not enough. You will need to continually manage it in order to prevent against depletion from inflation, asset losses d to significant market moves, and to cover major purchases that you have without eating into your principal. In increasingly uncertain times, managing your wealth can be incredibly difficult but here are some considerations that you may want to examine.
Diversification in Name and Fact
Diversification has been long lauded as the one freebie for market performance. In the world of risk and return, and with wealth management and not wealth creation being the goal, diversification is a key concept. If you are looking to create wealth, it may not be a good idea to be thoroughly diversified as you have less to gamble with and may want to make a more concentrated and educated bet on one investment or another. When you have wealth, diversification is more important to protect your assets.
When you are diversified, your investments will not move in correlation with each other. If one position goes down, there is more likely to be an alternative position that increases to offset this loss and the portfolio that you have should increase overall with the general increase in the market. While correlations between different investment industries is useful to know, when black swan events hit, most investment positions will decrease simultaneously, albeit in different rates.
To protect against this, true diversification is important by holding investments that are negatively correlated with other investments such as by holding gold, silver, and cash as a hedge against your investments. By doing so you can have a more balanced portfolio that is protected against significant losses during market downturns, even if you will somewhat hamper your returns when the market is up.
When you have a significant amount of wealth, alternative assets may be a way of effectively increase your wealth or at least maintaining it. Examples of alternative investments are holding real estate for rental or development, owning equipment that you lease, and holding ownership in small non-public entities. These investments may require additional work as compared to an stock investment but provide the potential for more significant gains and provide diversification away from the stock market at large.
If you like the idea of alternative investments but don’t have the time or interest to spend on managing them, then you can have a third party manage them for you, albeit for a fee. An example of this would be a real estate management company that collects rent and finds tenants on your behalf.
Paying Attention to Currencies
Diversification is important on a global basis as well and you will need to pay attention to foreign currencies as part of your wealth management. Investing overseas in developed and developing markets can provide outsized returns and protect you from a concentration of wealth in your local country’s currency. Try looking beyond your borders when trying to find investments to pursue and pay attention to the potential and stability of these international markets.
Managing wealth is different than building it and changes in your investment plans should be made. Diversification should be a priority, as well a search for alternative and international assets to better protect and grow our wealth.