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Sunday, 4th May 2008

Wealth Enhancement and Storage

Wealth Enhancement and Storage
Source: Economic Outlook (American Enterprise Institute)

The desire to enhance and store wealth has been present ever since income rose above subsistence levels. In ancient times, prior to the creation of symbolic financial claims on wealth, wealth storage was, quite literally, the storage of intrinsically valuable articles in temples, pyramids, or other such formidable structures. Even today in Tibet, which was long a theocracy, a major repository of wealth can be seen in religious statues of solid gold resting in temples.

The enhancement and storage of wealth by individuals--as opposed to kings or religious organizations--grew rapidly after the Middle Ages. Italian and Dutch traders amassed great fortunes in the fifteenth and sixteenth centuries. After the Industrial Revolution, large fortunes were accumulated in England. The accumulation of great wealth always brought with it problems of enhancement and storage. Enhancement often meant moving into businesses unrelated to those that first created the wealth for an individual or family. When the desire for wealth enhancement (as opposed to wealth storage) grew too intense, fortunes were sometimes lost. Striking the right balance has defined successful wealth management.

The dangerous stage for many wealth managers arises when the prospects for wealth enhancement (as opposed to storage) seem to become overwhelmingly attractive. Bubbles arise, be they tied to the price of tulips, tech stocks, or Miami condos. A bubble occurs when investors believe that purchasing a particular means of storing wealth will yield such strong returns that a substantial rise in living standards will be possible much sooner--and for many more people--than previously imagined. Journalist Samuel Crowther's 1929 interview with General Motors financial executive John J. Raskob, published in Ladies' Home Journal under the title "Everybody Ought to Be Rich," comes to mind. It cited an expected annual return on stocks of 24 percent. Contemporary examples abound in print and on television about how to grow rich in real estate. Some people do. Many do not.

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