I guess we should start by explaining what a growth economy is. A growth economy is an economy that is experiencing an increase in its Gross Domestic Product (GDP) and other key economic indicators such as employment, income, and consumption. In a growth economy, there is typically a focus on increasing productivity, expanding markets, and developing new technologies and industries. Wealth creation can be particularly challenging in this type of economy, but it can also provide significant opportunities for those who are prepared to take risks and invest strategically.
However, as important as wealth creation is, wealth preservation is equally important, if not more so. In a growth economy, wealth preservation strategies can help manage risks, minimize taxes, and protect assets, enabling families to build and preserve their wealth over the long term.
What are some of the most effective wealth preservation strategies for families in growth economies? The list may be longer than you thought including things like diversified portfolios, comprehensive financial planning, estate planning, and risk management. As with all financial decisions there are risks, challenges and opportunities that come with investing in growth economies, but with the correct know-how and direction HNW families can navigate these complexities to build and preserve their wealth for future generations.
One of the most effective wealth preservation strategies for families in growth economies is to diversify their investment portfolios. Yes, you’ve probably heard it before; diversification is key when it comes to stability and preservation, but it’s never been truer than it is now. The financial landscape of the world in 2023 is fragile and ever-changing, especially in growth economies. This means investing in a range of different asset classes, such as stocks, bonds, real estate, and alternative investments, is not only clever but vital to spread the risk and minimize the impact of any one asset class underperforming.
A diversified portfolio with a greater part of investments in private market assets helps families to achieve a higher rate of return over the long term, as they will benefit from the higher long-term returns of this specific asset class. These portfolios are known as “Endowment style portfolio”; the Endowment portfolio of Yale University is one of the common examples in this area. However, achieving a diversified endowment style portfolio requires careful consideration of the family’s risk tolerance, investment goals, and time horizon, which is where the advice of a qualified and experienced financial advisor can be invaluable.
Comprehensive financial planning is another key wealth preservation strategy for families in growth economies. This involves taking a holistic view of the family’s finances, including their income, assets, liabilities, and long-term financial goals, and developing a personalized financial plan that takes into account their unique circumstances and risk tolerance. Understanding a family’s ambition and future plans is key to creating a comprehensive financial plan that should cover all aspects of the family’s financial situation, including retirement planning, estate planning, tax planning, and risk management. It should also be regularly reviewed and updated to ensure that it remains aligned with the family’s changing needs and circumstances. Remember, plans change but shrewd people adapt.
Estate planning is an essential component of forward-thinking wealth preservation in growth economies. It involves developing a plan for the transfer of assets to future generations, optimizing estate taxes, and ensuring that the family’s wishes are respected after they pass away. Estate planning will typically involve the use of trusts, wills, and other legal structures to transfer assets to beneficiaries in a tax-efficient manner. It may also involve the establishment of a family foundation or other philanthropic vehicle to support charitable causes and ensure that the family’s legacy is preserved over the long term, covering any conceivable unforeseen bumps in the road.
Risk management is another critical component. This involves identifying and managing the risks that the family’s wealth may face, such as market volatility, inflation, currency risk, and political instability, especially if this isn’t an uncommon occurrence in their country of residence. One effective risk management strategy is to diversify investments across different asset classes and geographies. Another is to use insurance products, such as life insurance, to protect against the loss of income or assets due to unexpected events. Having a whole of life insurance plan in place, provides peace of mind, security and also certainty as it protects the family against the unexpected early demise of the breadwinner (the so-called worst-case scenario). But it also provides certainty knowing that the insured funds will be available to the family when needed.
Other effective risk management strategies include investing in savings accounts or other low-risk investments to provide a stable source of income, managing capital gains tax liabilities through careful tax planning, and regularly reviewing and adjusting investment strategies to reflect changing market conditions.
It’s certainly clear that wealth preservation is essential for families in growth economies who want to build and preserve their family wealth over the long term. Diversifying your investment portfolio, comprehensive financial planning, estate planning, and risk management are all critical components of an effective wealth preservation strategy.
