It is undeniable that, with each passing day, the rich are becoming increasingly distanced from the poor and even from the middle and upper-middle classes. Whilst it is true that wealth continues to be created from nothing or very little, the growth of established fortunes is unequivocally rising at a greater rate. One factor that may explain this widespread growth amongst the wealthy is, perhaps, their ever-increasing understanding of the economic world, but also their use of specialist advice. An increasing number of wealthy individuals are preserving and growing their assets over time by developing their own expertise and/or engaging specialist services in high-net-worth management (ffamily offices). Private banking is no longer sufficient – in fact, it never was – as the comprehensive services required by anyone with medium to high net worth quickly overwhelm any bank manager. Furthermore, their dependence on the financial institution itself renders them ethically unfit to provide wealth advice to their clients, not to mention the technical incompetence of many of them. But let us not talk about bankers; let us turn to a more pleasant subject: asset diversification for high net worth individuals, which is also applicable to those with medium-sized portfolios. We shall therefore continue our work to demonstrate in practical terms that most of the protocols designed for managing large fortunes are also highly profitable for smaller estates.
The wealth of High Net Worth Individuals (HNWIs) – that is, individuals with the greatest financial resources – according to the annual report by Knight Frank, they invest 42% of their assets in property. Consequently, 58% is invested in other types of investments – a word of warning. If we all work out what weigh When it comes to the proportion of our properties relative to our total assets, most will be well above that figure. Furthermore, large investors tend to buy properties prime, In other words, the most sought-after and expensive ones. It is obvious to everyone that a prime property will have greater liquidity in a market in crisis than any more ordinary property, even if the latter is cheaper. The reason is obvious: the wealthy who wish to buy a high-end property are not as badly affected by economic crises, and therefore there continues to be demand for such assets, which in turn prevents prices from collapsing as they do in the rest of the sector. The return on these properties lies almost exclusively in capital appreciation, as the rental income is, in most cases, merely enough to cover maintenance costs. Logically, they will seek this capital appreciation in countries where the property market is stable or in markets too rising o emerging, those with the riskiest profile. But they will never do so in markets where property prices have already risen to saturation point, let alone in property bubbles.
At this point, let us once again compare the strategic position of the middle and upper-middle classes with that of the rich: What have most Spaniards done with their spare cash in recent years? Clearly, we are not talking about those who can barely afford to pay off their own, single mortgage, but rather those who have purchased – with or without a mortgage – other properties as a «safe investment» in which to put their savings. The answer is obvious: they continue to buy more and more properties that are not prime in a property market that it is not stable far from it growing or emerging. They may now be more selective, or at best have stopped buying, but very few have adjusted their strategy in line with the radical changes that the property market and interest rates have begun to undergo.
Making money by investing in property at the height of the property boom has been a piece of cake in recent times; even the most inexperienced have made huge capital gains. The bank would finance 100% (or more) of a property at a ridiculously low interest rate, and within a few months – or even weeks – the property’s value would rise spectacularly compared to the initial investment. Nowadays, some people are already facing serious difficulties in keeping up with these mortgages, whose interest rates are no longer a laughing matter. Others are beginning to realise that they will have to carry some mortgages for longer than expected. What’s more, prices have stopped rising or are even starting to fall, with a few exceptions. prime, of course.
Faced with this situation, what are many average investors in Spain doing? Quite simply, some have stopped risking their savings on new property developments – which are now seen as highly «uncertain» – and are instead «securing» their surplus assets on the stock market… A surreal strategy if ever there was one. What’s more, almost all of them refuse to sell their properties at current market prices, arguing that prices will never fall: «For less than so much »I’m not selling, I’m in no hurry, it will always be worth more.’ They compare these figures with the asking prices found in property listings and confirm their theory that, with very few exceptions, prices do not fall but simply stop rising. It’s a pity they forget one a minor detail: They are not for sale. The opportunity cost from that point onwards is enormous. The fall in prices is a matter of time, interest rates and the prime whichever property it may be. Consequently, the ability to maintain asking prices over time will depend on the owner’s needs. In other words, buyers with more modest means, who are hardest hit by rising mortgage rates, will have to lower their asking prices sooner if they wish to sell, whilst more affluent investors will be able to keep their properties on the market at above-market prices for longer, but will pay the opportunity cost of going against the trend. However, properties that are closer to prime level will be more likely to sell at the desired price.
At this point, why don’t we adopt the strategy of HNWIs and become Medium or even Low Net Worth Individuals? From our perspective, the answer is clear: firstly, a lack of knowledge about the correct strategy for each cycle; secondly, the widespread inability to invest in fixed income through high-yield financial products tailored to our investment capacity; and thirdly, the Latin culture of windfall and the drive to create sudden wealth.
For those with average or even low net worth, their own home already more than adequately covers the appropriate proportion of property holdings for an HNWI. In other words, our investment in property should focus on paying off our own mortgage over many years, and our savings should be channelled into fixed-income and equity assets in proportion to the current economic cycle. As wealth increases, our investment horizons will broaden, seeking to maintain a strategic allocation across the four main asset classes: fixed income, property, companies/businesses and equities. This allocation should be adapted to the prevailing economic conditions at any given time.
This financial progression goes hand in hand with personal development, as defined by…
Abraham Maslow began in 1943 with his famous pyramid. Company Blog He offers us a light-hearted and up-to-date analysis of this through Pau, to whom, incidentally, we would like to publicly wish a happy birthday, so that he may continue to combine sound economics with entertainment through his sharp wit. At Family Office, a few years ago we adapted this theory to the world of high-net-worth personal finance, replacing the ‘Needs for Ego and Self-Actualisation’ with ‘Public Recognition’ and ‘Philanthropy’. This is based on our experience with family office clients.
In short, as our friend said Echevarri: «You have to be able to read the stage of the match we’re at.» And I would add that we also need to have the mindset and strategy of a top-flight team without losing sight of our limitations. After all, aren’t there teams at the top with very modest budgets? Once we’ve reached a certain level, the hard part will be staying up there, just as our headline says. «So let’s start with the easy bit…»