Last week, we looked at the devastating effects inflation can have on the real value of your wealth. We did so in terms of both its capital value and your ongoing income requirement, which invariably increases as time goes by.
If you already have some wealth, this subject will be close to your heart. If you have not yet created much wealth, you might not be paying attention to inflation but it's best that you become educated so that when the impact is magnified over time, you'll be prepared.
There are many tips, references, systems and methodologies available to study and adopt when it comes to managing wealth. No one person is going to be an absolute expert and those who have superlative skills are likely already protecting a vast pool of wealth themselves. Warren Buffett or George Soros are two examples of successful self-made investment magnates.
While the principles and investment theories of these billionaires are sound, even they need to be able to adapt to ever-changing situations across global markets.
Some of the theories related to what moves markets can seem far-fetched. Take, for example, the Barclays Property Skyscraper Index, which received a lot of media attention recently. It claims a correlation between the building of record-high skyscrapers and subsequent financial market crises. For example, 40 Wall Street was built in 1929, the Chrysler Building in 1930 and the Empire State Tower in 1931, while the Great Depression followed soon after. The completion of the World Trade Center in 1973 and Sears Tower in 1974 was followed by the oil crisis and market turmoil of 1974-1975. Petronas Towers in Kuala Lumpur was completed in 1997 and followed almost immediately by the Asian economic crisis.
During the next six years China will complete more than 124 skyscrapers, increasing its total of buildings of this type by more than 80%. India currently has two of the world's 276 skyscrapers and is scheduled to complete 14 more in the next five years. Although none of these will set height records, are we staring at these two emerging major economic powers faltering in the wake of such construction achievements?
Among more current shorter-term signs, confusion seems to prevail. Despite Italy having the same credit rating as Kazakhstan and eight other European Union countries being downgraded, the EU's bailout bond fund was three times oversubscribed when it was auctioned recently. Moody's predicted that banking stocks would fall this year and three UK bank shares rose nearly 10% the next day. The following day the International Monetary Fund reduced its global forecast for the year and the same banks rose again. Doom-mongers may be correct, but not just yet.
It is an election year in the US, Russia and France and this could mean politics will take precedence over a full economic recovery. The danger is very real, particularly in the US where we have seen so much irresponsible behaviour and political brinksmanship in the past year or so. Will this adversely affect market performance?
The point here is that there is no right or wrong. There are trends and events that will cause gains and losses, possibly affecting your wealth.
There are many corporate profit warnings emerging for specific companies, which could further influence market trends. Such developments are not all necessarily bad and many may create good buying opportunities. Tesco was a recent example of this. Its share price plummeted following a profit warning although it is generally understood that the price will recover relatively quickly.
So should you place your money in a bank deposit and make a paltry return that will not even keep up with inflation? You will also be similarly hoping that the bank is a little safer than Lehman Brothers, which was invincible _ wasn't it?
Perhaps you should make some wise investments in different asset classes. Have you considered property and non-correlated assets as well as perhaps some sensible commodities? How do you find out what is available and then how do you invest in these areas in a way in which you feel comfortable? Are you minimising the high fees and charges often levied on the innocent investor? These are often imposed by the most reputable banks and large organisations because people are confident that they are "in the right hands".
An independent financial adviser can conduct a free financial health check to profile your current situation and map out a plan towards financial independence. He or she could also advise you on fees related to your investment rather than leaving you at the whims of larger institutions.
As you plan for your own future, keep in mind six trends prevalent in the world today which could have a bearing on your wealth protection:
STRENGTHENING EMERGING MARKETS
Emerging markets have one real economic advantage over the Western world: Labour is cheap and will remain so for some time. They also have a combination of labour and natural resources that will beat the rest of the world hands-down. Emerging markets are thus still thought to be the powerhouse of the world in the future. Asia continues to be the most significant of them all.
COMMODITIES
There can be no reduction in the demand for commodities while the world's population continues to grow (see "Net Worth" July 27, 2009, "The Commodity Super Cycle"). This super cycle is still thought to be in progress despite recent dips in values.
WESTERN STAGNATION
Given the struggling economies of the Western world and current aspects such as the EU debt crisis, it is going to be difficult for these economies to regain substantial growth in a short time frame. They are more likely to stagnate.
TECHNOLOGY
With the technology acceleration trend in the past 50 years there is no reason to feel that this will slow down any time soon. It is actually likely that technology will advance even more rapidly.
BIOSCIENCE
Advances in this area have gained momentum recently. It is highly likely that further developments in bioscience and pharmaceuticals will continue gaining ground quickly.
DEMOGRAPHICS
Medical and bioscience technology advances are increasing longevity, and the world will be forced to deal with the economics of this silent, powerful time bomb.
These points do not form the precise scenario for what will happen in world markets this year. They are trends that may affect what happens. To use these developments to your advantage in preserving your wealth you will be wise to engage a professional adviser to assist you in all the aspects of your business of living life.
Andrew Wood has been an expat in Asia for 32 years and is executive director of PFS International. His articles, which cover the complete A-Z of financial planning, are available through the PFS library to readers on request. Questions to the author can be directed to PFS International on 02-653-1971 or e-mail to enquiriesthailand@fsplatinum.com