Wealth preservation: A (mis)calculated risk?

How focusing on the wrong risk has undermined wealth preservation strategies.

23 January 2015

Multi-Asset Investments

“Rule No. 1: Never lose money.
Rule No. 2: Never forget rule No. 1”
– Warren Buffett.

The world’s most successful investor is keenly aware of the power of compounding and how it works both for and against portfolios – positive returns generate future wealth but negative returns are extremely difficult to regain.

 

"Blending assets that hedge inflation with others that offer consistency or provide long-term growth opportunities, we arrive at a solution that meets our definition of wealth preservation."



These sage words apply to any investment objective. They particularly ring true when it comes to wealth preservation. At the most basic level, wealth preservation strategies should protect against loss; the goal is to ensure that the value of the portfolio today will not be lower in the future. Where it becomes more complicated is in how to measure success. Should the portfolio maintain its value on an inflation-adjusted basis? Should the opportunity cost be calculated, assessing whether higher returns could have been generated at similar risk levels? What happens if there is an unexpected need to withdraw capital?

In this article (which can be found at the link below), we set out to develop a wealth preservation solution that protects against the corrosive effect of inflation while balancing opportunity cost and accommodating the potential need for capital. Examining the six asset classes that have traditionally been touted as wealth preserving, we see that none of these addresses the four pillars that comprise our definition of wealth preservation. The risks in these traditional approaches are unbalanced – so-called “safe” investments fail to maintain purchasing power, while the more aggressive growth assets are too volatile for comfort.

We take a risk-balanced approach, constructing a portfolio based on understanding the asset classes’ underlying sensitivities to different types of risk (inflation, interest rates and economic growth). Blending assets that hedge inflation with others that offer consistency or provide long-term growth opportunities, we arrive at a solution that meets our definition of wealth preservation. This diversified portfolio builds on the strengths of each asset class while minimizing the impact where each falls short.

This research underscores the fact that there is no risk-free way to preserve wealth. A deeper understanding of the different types of risk and a balanced approach to investing are key to successfully preserving wealth for all investors.

The full interactive article is available below.

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.