Building Wealth Through Diversification
What is Wealth? In our current society, with the global economic meltdown, it is becoming more difficult to define wealth. The definition varies from person to person depending on their definition and how they define it. What is Wealth to one person may not be Wealth to another. Wealth to one person may only be money, while to others it might be their lifestyle or things they have built that are worth money. Here are some common ideas regarding what is Wealth.
The first definition we will look at is “The acquisition of goods and services.” This has become critical in recent years with the global credit crunch and recessions. However, this has not always been true. Wealth has always been viewed as having a lot of physical products like land, raw materials and other such assets. This has become critical in the modern world where production has become more automated and because of computers and other technical advances, goods and services have become less expensive. This means that people can buy more without the need for reinvestment, depreciation and other such costs.
Another common idea in economics, and in particular in the world of finance, is that wealth creation is a result of efficient production. Therefore, efficient management of resources is necessary for any meaningful wealth creation. Wealth is the creation of value in the market place. The first concept in economics that was critical in the definition of wealth creation was the concept of price action. This means that the prices of goods and services were determined by the supply and demand for them in the market place.
The second popular economic concept regarding wealth creation is accumulation. A wealthy individual accumulates wealth by creating wealth through investment or savings, and/or the accumulation of wealth through inheritance or estate. Net worth is the amount of value that is added minus the amount of value that is subtracted in any given transaction.
Risk management is another important concept regarding building wealth. In virtually all areas of the business world, risk is either inherent in nature or can be minimized. Risk can also be managed. Assets can be converted from lower to higher value to protect against the adverse effects of changes in market conditions. There are numerous methods of managing risk including derivatives (e.g., interest rate), option, foreign exchange, mutual funds, and insurance.
Wealth can also be measured by using a different approach called asset value. This is the standard of wealth management used by the International Monetary Fund and the United States Department of Treasury to measure the value of government and private financial portfolios. By comparing portfolio assets against known risk, the potential return on portfolio assets can be estimated. This methodology is used not only by governments but also private financial portfolios. While this method takes into account the probability of loss and also provides a statistical comparison of expected returns, it does not incorporate the current condition of the portfolio.