Tag Archives: wealth

The Essence of Wealth Management

Wealth management is a lifelong task. Either you are an individual investor or a professional asset manager, the central goal is to steadily increase your wealth through proper management of capital. Personally, I think there are two keys to successful wealth management: diversification and customization.

Diversification for Capital Growth

Every single investor has to face a certain level of risk when investing in the capital markets, ranging from bonds and equities to derivatives. Diversification can be effective in optimizing the risk-return payoff through well-structured asset allocation. Simply speaking, investing in asset classes with alike market performance could lead to huge reward, or huge loss as well. Comparatively, the exposure to diverse assets with different or even opposite performance is therefore a great hedging strategy, leading to stable investment return in the mid- to long-run.

Customization for the Best Allocation

After knowing the importance of diversification, we still have to face a quantitative issue of “what is the percentage of each asset class in a diversified portfolio?”, which has to do with customization.

As said in the book “A Random Walk Down Wall Street”, the risks you can afford to take depend on your total financial situation, including the types and sources of your income exclusive of investment income. Your earning ability outside your investments, and thus your capacity for risk, is usually related to your age.

Therefore, there is not a “best” portfolio for everyone. A responsible asset manager has to develop the investment decision for a particular client based on the well-rounded mastery of his/her financial situation and beyond.

Personally, I interned at AIA Hong Kong office as a financial planner last summer. One of the tasks I accomplished was “financial health check interview”. The goal of the interview was to understand the financial status of clients and ensure their benefits from total protection. In the fact-finding stage of the interview, I collected financial facts, including income level, family expenses, aggregate debt, and investment style, as well as non-financial facts, including age, family status, diagnosed illnesses, smoking & drinking habits. The integration of all these facts would offer a strong fundamental for the execution of a tailor-made financial solution spanning insurance, savings, and investment.

In conclusion, a truly diversified portfolio is not the result of a random selection from various asset classes in the market. Instead, it is derived from in-depth analysis of their features and correlations, as well as the client’s earning power and risk appetite.

(Revised) Seemingly Obvious Information About Income Inequality

One of the best-known movements in recent years was Occupy Wall Street. The goal of this protest was to be the voice of the “99%”. The claim is that the “1%” was enjoying the spoils of success and leaving nothing for the 99%. The goal was to protest income inequality, which has been an increasingly growing problem in the United States. 1% of the nation controls a very large proportion of wealth.

Many wonder what the causes of this unequal distribution of income is the lack of intermarriage between social classes. In other words, the rich tend to marry the rich and the poor tend to marry the poor. Thus, making the rich richer and the poor poorer. In Jeffrey Sparshott’s Wall Street Journal article and Shaila Dewan’s New York Times article, these tendencies are discussed. People are tending to marry those with the same professional and educational background.

Michael A. Fletcher wrote an article in the Washington Post about how all of this affects the economy. He states that consumption, which has been decreasing, is about 70% of the economy. He attributes this to why the United States is recovering so slowly. The decrease in consumption can be linked to the rich becoming richer and the poor becoming poorer. When people have less money, they tend to save it. This means that they are consuming less. If this is how the 99% is operating, then consumption is going to be very low.

How can we combat this? One idea would be that rich people marry poor people. This would cause more people to have disposable income because the poor person marrying the rich person would suddenly have access to more money. Thus, they would spend more. If this happens, then it is clear that consumption would rise and the economy would recover at a quicker rate. 70 percent of the economy would be ameliorated. The problem is that this proposition is too idealistic, and is not entirely feasible. It is not possible to make every single rich person marry a poor person. That would be unconstitutional. Furthermore, making it that everyone has the same disposable income is pure communism. Another problem is that rich people and poor people do not tend to have the same social circles. Take New York City, for example. A wealthy lawyer from the Upper East Side probably will not be spending his time in Spanish Harlem, which is a very low-income area. This would reduce the interactions between people of different socioeconomic classes.

Seemingly Obvious Information About Income Inequality

One of the hottest issues over the past few years is inequality in America’s wealth distribution. The so called “99%” has made many grievances towards the so called “1%”. The 99%’s main argument is that a small percentage of the population controls a very large portion of the wealth.

In his article, Jeffrey Sparshott of the Wall Street Journal, discusses the seemingly obvious fact that wealthy people are marrying each other. Sparshott blames this fact for why inequality in income distribution is getting progressively worse. There is a growing tendency of people marrying those who have the same professional and educational background.

A New York Times article by Shaila Dewan, overlaps a lot of the information as Sparshott’s article about the wealthy not marrying people of lower socio-economic statuses. She also attributes the inequality in income to the fact that women have been earning more than they ever have. This is due to the higher rate of education in the female population.

In a Washington Post article, Michael A. Fletcher discusses the economic consequences of this income inequality. He states that it is one of the reasons why the United States is recovering from the recession at a slower rate. This is due to the fact that consumer spending has significantly decreased, and it is about 70 percent of the economy.

It seems that the economy is doomed if inequality in income distribution continues. The rich would be getting richer and the poor would be getting poorer. When people have less disposable income, they are more likely to save. As they continue to save, they are consuming less. Thus, 70 percent of the economy ceases to grow.

With all of that being said, it seems that one of the best ways to stimulate the economy is for a wealthy person to marry a poorer person. If every wealthy person married someone who is poorer, each of those poorer people would be another person who would have the means to consume. This would also be a way to reduce inequality. Obviously, the goal is not to make every family have the exact same amount of disposable income. That would nearly be communism. Consumer spending is the key to resuscitating the United States’ Economy. The other solution would be to create more jobs that pay enough for people to have money that they can spend.

The other interesting piece of information is that woman are earning more than they ever have. if women are marrying men that make more money than them, then this would continue the cycle of the rich marrying the rich.

Globalization: the Good, the Bad, and the Ugly

Globalization has certainly been extremely good to many people, especially the very poor people of the world, while all in all making the world more equal for everyone living in it. However, the downside is that globalization has created more inequality in the richer countries of the world, such as the United States. In 2012, the top 10% of the population in the U.S. made half of all of the income in the country (Fidler, Davos 2014). This is the highest amount in a very long time and it essentially means that the middle class and the lower class of the United States are struggling to keep up and are in fact falling further behind. So, rather than globalization helping everyone out, it is creating more income inequality in richer countries, which, if it continues, could revert the more developed societies back to the ways of the 18th and 19th centuries (Fidler, Davos 2014). The real meaning of this is that back then, the best ways (and only ways, really) to become wealthy were to either marry into it or to somehow be lucky enough to inherit valuable property.

As a student about to graduate from college in May, the potential possibility that the world could be more like this in the coming future is not very welcoming. I am someone who has worked hard all through school and plan on making a living through hard work in the real world. If I had my way (and I’m assuming most people would agree), the world would not go back to a state where someone can only come into wealth by way of marriage or an inheritance.

However, the reason that this topic is so difficult is that if the world hits a wall sometime soon and globalization stalls, this would not be so great either. In fact this sort of stall has seemingly already begun. “Investment controls and antitrust rules are sometimes ‘intimidating people from doing cross-border deals because of risks today that didn’t exist before,’ says Thomas Vinje, chairman of the global antitrust practice in the Brussels office of Clifford Chance, a U.K. law firm” (Coy, Campbell, and Kennedy, From Davos, a View on the State of Globalization). Today, and looking forward to the near future, many countries will probably look to control more of their information and products and keep them inside of their own borders as opposed to allowing other countries access to it. For example, “Australia now bans overseas storage of electronic health records. Argentina requires foreign luxury automakers to offset their imports of cars with exports of local products, such as malbec wine, all in the name of ‘trade balancing'” (Coy, Campbell, and Kennedy, From Davos, a View on the State of Globalization). Things like this will certainly (and already have) start to de-globalize the world as we know it, which is not such a good thing for economic activity and capital flows.

Looking at both sides of this double-edged sword, it is very difficult to take a side. If only there was some way to keep moving forward with the globalization of the world without creating more income inequality in rich, developed countries. I’m very interested to hear what goes on in Davos at the World Economic Forum over the next few days as globalization is something that affects all of our lives immensely.

Materialism and Morality

I came across this article in the Wall Street Journal today discussing the improved profits of the big banks in 2013. This is excellent news because it is almost surely a sign that the economy is in recovery mode. Three cheers!

Still, when I read stories like these, and think of the gargantuan amounts of money that bank executives make (oh, and see Paul Krugman trying to be a hipster by lauding the Occupy movement here), I can’t help but dwell on that nature of material wealth. Is it moral to have that amount of money when you could help people, a lot, by giving it away? And if it isn’t moral, how does having that wealth affect people spiritually?

I’m going to post a quote from the Bible, but I invite you to read it from either a secular, literary lens (as I am reading it) or a religious lens — whatever floats your boat, the discussion won’t be affected much:

It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God. -Matthew 19:24

We economists (even those of us who read this from a literary, not religious, point-of-view) should find this quote troubling because as economists, we are generally all about wealth acquisition. Now, I’m not saying that economists themselves only value the material — my biggest pet peeve is when people say that economics is all about money — but economists do see material wealth as, at the very least, something that gives people utility, and we generally see more of it as better. Are we, as economists, working in the wrong direction?

Obviously, as an economics major, I don’t think we are (there are much more nuanced discussions to be had on this topic, perhaps in another post), but I have decided it would be fun to create a model of homo economicus who come closest to fitting through the eye of the needle. The following are some indifference curves (in green) and a budget constraint (in black) for a “perfectly charitable” person, call her Oprah, who gives all of her money away:

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Notice that keeping money for herself does not give Oprah more utility, but increasing the amount that she gives away does, and so the point where she maximizes her utility is the point where she keeps no money for herself and gives all of it to charity. Nice work, Oprah!

We could also consider the opposite kind of person, a purely selfish guy named Ebenezer:

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Notice that giving money to charity does not give Ebenezer any extra utility, but keeping money for himself does; thus, he ends up keeping his whole paycheck. Boo you, Ebenezer!