How can you make sure that you retain the value of your wealth until you die? I am sorry to have to disappoint you but the short answer is that you cannot. That's the bad news. The good news is that you can try and, more importantly, that you have a fair chance of succeeding, if you try hard enough.
Basically, there are three ways to make money. You can be lucky and get someone to give it to you, maybe after they die. You can sell your time and abilities. You can risk money you already have. To make money by this third option you have to have money to start with.
When you die, the money stays put. In the meantime, if you made any money, you can give it away, spend it, have it taken away from you, or you can risk and lose it.
Financial and investment advisers are normally consulted about protecting and risking money and not about the first two - giving and consumption - since their ideas in this regard are all too human, at best interesting, at worst weird. On protection and risking money, one can at least try to use some logic and acquire knowledge.
People meet me in the streets, at social occasions, wherever, and ask me about money but I am more interested in what they think because money is a fascinating subject and one never stops learning and one never knows enough. Most people have very definite ideas about how to make money.
Perhaps the most illuminating - by an elderly gentleman whom I met at a wedding - was along these lines: that since death was certain, a contented life was of supreme importance, and that you should not spend time on money, but just see to it that you have enough money to spend over your remaining time.
There are a lot of different opinions. When you group them, many turn out to be fallacies. Following are some.
"Shares always go up, eventually." This is something a lot of people who dabble in investments take as sacred truth. It is not. If one looks at the share index of a major country over a long period of time, say 50 years or more, one sees a progression to higher values, with a number of sharp movements up or down. But here we are being wise with hindsight. We are looking at a market which made it. Many other markets did not and sank into oblivion. Similarly, the companies which made up the index 50 years ago are probably, except maybe the General Electrics of this world, not there any longer and were replaced by others.
Holding on to your old portfolio can mean hanging on to a sinking rock. Finally, it depends on when you bought and how long you are going to be around. If you bought at a very high level you may have to wait for a number of years to recover, and you have not yet started making a gain.
This problem, to a certain extent, can be mitigated by buying well-managed investment funds which buy and sell companies each year but they too suffer from general market fluctuations.
If you are in it for the long term, and the management keeps up, and you are well diversified, you may not need to be too anxious to catch every market fluctuation.
Shares gave successful investors great wealth but they are not a sure-fire way to make money, nor are they for the lazy.
Another interesting saying is that "Property in Malta always goes up". This is true, so long as Malta remains as we know it, or improves, so long as people want to live here, thus creating demand. We hope this will be forever, but who knows? Older people also remember times when property values did go up, but very slowly. Property is not liquid and cannot move, it is what is called a non-traded good, and thus often held hostage to all forms of taxation.
Others answer with just one word: "Gold." Gold is precious because it is a fascinatingly beautiful metal, great for decoration, and this beauty makes it universally desirable and, as a result, over the ages it has entered the human psyche as a store of wealth and as an unofficial international currency.
Its perception as universal money sometimes gives it a profile as a sort of "dollar hedge": when the main currencies are in doubt, go for gold. I doubt whether in dire circumstances it will ever beat a sack of flour, logs up North, or even a warm blanket. It is assumed that even if things get really bad, you can exchange gold for any of these things, that there will always be someone else who has these other things but who is avaricious for gold, or has a wife who is.
I suspect that gold has basically two main attractions. First, you can make money out of it if you buy it low and sell it high, like anything else. Second, you can hide a lot of value in a small space, carry it around with relative ease, and divide it as necessary, to make small and large payments. For gold to be precious in this way, you have to get physical delivery. Otherwise, my advice is to treat it like any other commodity. It is neither inflation-proof nor thief-proof.
Then there is that greatest of all financial inventions and the answer comes back - "Put your money in a bank account". The great thing about bank accounts is that interest is added to capital, which never falls. There are two problems. First, if a depositor gets the best interest rate he or she deserves, there will be no bank, and no "guarantee" on capital. Second, even if a depositor does get the best interest rate, there is no assurance that this rate will be higher than the inflation rate. And yet so many people believe that an ideal investment, a "good investment", is a super bank account with a higher rate of interest, top security, access to capital, etc. In the investment world, a bank account is not the rule, it is the exception; it has been created to be an exception.
It comes as a surprise to most people, for example, that if fixed deposits were made to be transferable from one person to another, you might lose money on such a deposit if you transfer it before maturity should interest rates rise, or make money if interest rates fall. That's the real world economics which is concealed.
We came to a point, therefore, where we realise that there is no certain way to preserve wealth. What a person can do is to learn, to think, and to be active in managing his or her wealth to avoid the common pitfalls which are always ready to chip away at one's money.
(The next article will take a look at the main pitfalls which one should try to avoid in order to preserve capital.)
Mr Azzopardi is managing director of Azzopardi Investment Management Limited (www.azzopardi.com) which is licensed by the MFSA to provide investment services, including stockbroking. This article is only meant to provide information, which the writer believes to be accurate at the time of writing, and is not intended to give investment advice and its contents should not be construed as such. The value of securities, and the currencies in which they are denominated, may go down as well as up. Readers are requested to seek professional financial advice tailored to their own personal circumstances.