About half of millionaires would not have classified themselves as millionaires at 2000 prices.
A million dollars ain’t what it used to be, writes Stephen Wagstall, editor of FT Wealth and FT Money, for the Financial Times. High inflation hits the pockets (and trust funds) of even the very rich, and few can ignore the effects of rising prices.
Of course, the pain is very unevenly distributed, with poorer people bearing the brunt. But even at the top of the wealth pyramid, the impact is clear.
The real value of wealth has eroded over the past two years at its fastest pace in more than 40 years, with inflation at its highest since the early 1980s in the US, UK and European Union.
In dollar terms, inflation reduced wealth growth by 6 percentage points last year, turning a nominal gain of 3.4% into a real loss of 2.6%. That’s according to the Annual Wealth Report, a guide to the financial health of households produced by Credit Suisse/UBS.
This is hardly a surprise given the rise in inflation, which reached 8.3% in the US. More amazingly, even in the previous two decades, when inflation was low, rising prices still managed to eat away at asset values.
As the data show, there have been five years since the turn of the century when nominal investment returns exceeded 10%, but none in which real returns reached that level.
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Put another way, in numbers produced for FT Wealth, authors from Credit Suisse estimate that only 34 million of the world’s 59 million people with assets of more than $1 million last year would be classed as price millionaires since 2000
For those with assets of over 50 million dollars, only 112,000 people out of a total of 243,000 did not fall below this threshold in real terms. As the report says: “Inflation has eroded the real value of wealth this century (and made it easier for people to become dollar millionaires).” And this happened over a two-decade period when US inflation rates averaged just 2.5 the percentage.
Interest rates are currently falling from their recent highs in the US and Western Europe. However, few economists expect a return to the low average of 2000-2020. This decade, in so many ways, is proving to be quite different, with huge disruptions to global stability, trade and finance.
The range of inflationary risks stemming from geopolitics is particularly wide, including Russia’s invasion of Ukraine (which has pushed up agricultural prices), economic sanctions against Moscow (which are weighing on the oil market), and stability concerns in the Middle East (oil again ) and around Taiwan (electronics supplies).
Added to this are the remnants of monetary expansionism from the years of cheap money and pressure from workers to increase pay after decades of declining or stagnant real wages.
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How should investors react? One lesson from the indexed numbers is the centrality of inflation in estimating how much money you need to live on if you are not working and receiving no income. Like retirement savings, for example. Or a family trust fund. What ultimately matters is not the size of your assets today, but the future value of the income you will derive from them – in real terms.
Skilled wealth managers often urge clients not to focus too much on whether their nominal return beats a portfolio benchmark (such as a stock or bond index), but instead to concentrate on real returns. Such advice can often sound like an excuse from an underperforming manager worried about losing a client to a benchmark-beating rival.
But it’s useful to remember that beyond the financial markets there is a real world where the money withdrawn from the wallet is actually spent – in inflation-adjusted dollars, euros and pounds.
It’s advice that’s particularly relevant now, when markets (and indices) are volatile and inflation, while falling in most developed countries, looks like it may be holding on, Wagstall concludes.
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2023-10-27 12:22:00
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