Saturday, August 02, 2008

Managing Wealth is a Skill

In my younger days, I often wondered how people with less wealth than their clients could competently manage finances of wealthier people. After all, I thought, if a person (e.g advisor, stock broker, accountant, financial analyst) was good, shouldn't they also be wealthy? However, I've come to realize that managing wealth is different than creating and accumulating wealth.

Maintaining wealth is a skill, a process that can be learned. That's why people with less wealth than their clients can competently manage the wealth of the rich or super rich. In my experience, maintaining wealth is about:

  1. Maximizing return with low relative risk. The classic approach is diversification of asset classes such as equities, fixed income, real estate and hard assets. Within each asset class there can also be further diversification.

  2. Preserving capital on an inflation adjusted basis. Although the markets will fluctuate short term, it is important to ensure the investments grow long term at a rate fast than inflation. In addition to asset diversification, controlling varying withdrawal rates for different market conditions can help. For example, withdrawing less when the portfolio is down can minimize principal loss.

  3. Minimizing taxes and expenses. Keep more of one's wealth by paying less on one's earnings. Knowing the tax code and finding low investement costs are two opportunities

There are known and proven techniques for doing each of these elements. Someone knowledgeable in these techniques and good implementation skills can competently maintain wealth for those that already have achieved it.

On the other hand, creating and accumulating wealth is different than managing wealth. More on that topic tomorrow.

For more on Reflections and Musings, check back every Saturday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC

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