Preserving wealth vs growing wealth

When we are younger, our aim is to put our money to work. We want the value of our money to increase over time so that we can reach a point where we no longer have to work for an income. This is called financial independence and it’s generally the main goal of wealth building.

Once we achieve financial independence, we want to make sure we hold on to our money. That means protecting the money we want to draw from to cover our expenses from market movements that can take away our returns. It also means not drawing so much from our savings that we run out of money. During the wealth preservation phase, we must learn how to strike the balance between keeping money safe while still achieving inflation-beating growth.

What do we mean by wealth?

When we talk about wealth, we aren’t talking about the luxe life. Your wealth is the value of everything you own, whether that amounts to several hundred or several hundred thousand.

This includes all the money in your accounts, your investments, and all the physical and intangible assets you possess, such as your car, or any valuable jewellery or artwork.

You can calculate your overall wealth by adding together the value of these three key elements:

1. Personal property – this can include land, homes, and valuable assets such as art and cars.
2. Personal savings – this includes all the cash savings you have earned, accrued or inherited over time.
3. Income-producing assets – these are the investments that generate revenue for you, such as your stock portfolio or other sources of passive income.

In financial terms, your net worth is the value of these elements rolled into one sum, minus any debts or liabilities that you may have.

Wealth growth vs wealth preservation

There are two phases to your wealth management – growing your wealth and preserving your wealth. While you're growing your wealth, you will be seeking out ways to increase the value of your property, savings and income-producing assets. When you're preserving your wealth, you're more concerned about avoiding any losses so that you can live off the money you saved when you’re no longer earning an income.

Wealth growth

Wealth growth focuses on the accumulation and growth of your personal wealth and is best done when you're young. Newbie investors can afford to endure a few losses as they have the earning power to replace any lost capital over time. Higher-risk portfolios focused on higher returns can offer a quick and easy way to build your wealth, and by taking on a bit more risk, investors hope to be rewarded with higher returns, which will hopefully lead to faster wealth growth.

Some popular wealth growth strategies include:

Aggressive investment

This is a higher-risk approach to investing and involves concentrating your assets into high-growth businesses which have huge potential.

Manual investing

This is an extremely active approach to managing your investment portfolio and involves a huge amount of market knowledge to allow you to hand pick individual stocks and shares.

High-risk investing

High-risk, high-reward investments are the holy grail for aggressive investors seeking to grow their wealth. This means investing in start-ups, unregulated companies, and emerging asset classes which do not yet have a track record. As the name suggests, there is a very high risk that you will lose money by pursuing this strategy.

Of course, there is always a risk that your investments won’t work out, and you will lose money instead of growing your wealth. Therefore, it’s always important to maintain a diversified portfolio to minimise any losses, and to do your due diligence before making any new investment. Ideally, any losses that you make will be offset by your gains, so it’s a good idea to factor this in when you're predicting your returns.

Wealth preservation

Wealth preservation, or protection, is often used by individuals who are keen to protect their assets to provide a reliable income so that they can experience the financial freedom which comes with a certain amount of wealth.

Some popular wealth preservation strategies include:

Asset management

This involves maximising the value of any assets that you own, such as a property portfolio. It also involves succession planning, to ensure that your assets are protected from over-taxation or other wealth eroders after you pass.

Diversification

A well-balanced portfolio should provide coverage across the market, with exposure to a mix of equities from different sectors, as well as bonds and other fixed income investments. It should also include an allocation towards alternative investments and commodities, which are less correlated with the stock market.

Goal management

Wealth preservation requires long-term goal setting with a set end point in sight. If you're preserving your wealth for retirement, the cost of long-term care, or as an inheritance for your loved ones, it’s important to plan ahead so that you can be aware of any potential tax liabilities or other issues.