If you have accumulated wealth, you may be wondering if you should focus on preserving that wealth or accumulating more. While many people may automatically think accumulating more wealth is the way to go, that may not always be the case for every financial situation.
It may be beneficial to understand the key differences between wealth preservation and wealth accumulation, as well as why one strategy could be more advantageous than the other. Understanding both financial strategies may help you make more informed decisions when you decide it’s time to make adjustments to your portfolio so that your wealth is better protected.
What Is Wealth Preservation?
Wealth preservation is a term used to describe financial strategies that protect the wealth a person has accumulated. Some common wealth preservation strategies include financial planning, insurance, and portfolio diversification.
Wealth protection is something that is recommended for consumers once they begin accumulating assets. The last thing you’d likely want to do is make sound financial decisions that lead to increased wealth only to lose that wealth because your assets aren’t safeguarded as well as they could have been.
What Is Wealth Accumulation?
Wealth accumulation is the act of gaining assets in order to increase your net worth. Typically, wealth accumulation happens over an extended period of time and helps provide financial security and stability later in life.
What’s the Difference Between Wealth Preservation and Wealth Accumulation?
Wealth preservation and wealth accumulation sound similar, but they are fundamentally different financial strategies. Wealth accumulation emphasizes identifying assets that have the potential to appreciate and grow wealth. Wealth preservation strategies, on the other hand, are employed to help protect against losses that may negatively impact the wealth you’ve accumulated.
Often, people employ both strategies simultaneously, preserving the wealth that’s already been generated and taking steps to accumulate more assets. Sometimes a financial strategy may serve the purpose of both wealth preservation and wealth accumulation.
An example of a strategy that could provide wealth preservation and wealth accumulation is having a self-directed precious metals IRA. Historically, precious metals like gold and silver have been considered a hedge against market downturns and inflation that could erode wealth that’s been accumulated through other assets. This is largely because of the fact the price of precious metals isn’t tied directly to the relative strength of the U.S. dollar or the performance of stock markets. It’s a physical asset with intrinsic worth that isn’t connected to the Federal Reserve, international banks, or the global economy.
The Role of Risk Management in Maintaining Wealth
How much risk are you willing to take on to help grow your wealth? That’s a question you may hear from a financial advisor. Risk is involved when acquiring any assets that could increase or decrease in price. Risk management is involved when working to preserve the wealth you’ve accumulated. Financial experts, including the World Gold Council, have noted that “maintaining a proper portfolio risk management strategy is as important in good times as it is in bad.”
One of the primary goals of risk management is identifying possible risk factors that could place your wealth in jeopardy. Once these factors are identified, you can then decide which steps to take to mitigate your overall risk exposure.
Balancing risk is usually the tradeoff between wealth preservation and wealth accumulation. Taking on greater risks could lead to more wealth accumulation, but it’s not necessarily the best strategy for wealth preservation. As you get older, you may find that your acceptable level of risk is lower because your time horizon—the amount of time you have to achieve your financial goals—is shorter.
No Matter the Strategy, Diversification May Be Key
When determining how to best preserve the wealth you have while possibly continuing to accumulate more, one of the most important factors to consider may be diversification. Depending on your unique situation and conversations you might have with a financial professional, your portfolio diversification needs may vary.
Many financial advisors will agree that a portfolio should be diversified for both wealth preservation and wealth accumulation. By dividing your wealth among various assets and asset classes, you can help limit your overall risk exposure because there’s less potential for a significant negative impact on your portfolio should a single asset or asset class decline.
If your portfolio contains a healthy mix of assets or you have already decided which types of assets you’d like to own, you may be ready to enact your asset allocation strategy. Asset allocation involves deciding how much of each type of asset will make up your portfolio—often with the goal of maintaining a strong balance between wealth preservation and wealth accumulation. You may find that an even split among all your chosen asset classes could work, though it might be best to have a few select assets make up the bulk of your portfolio while other asset classes primarily serve to either protect or grow your wealth.
Want a better idea of how diversified your portfolio is right now? Take the Diversification Quiz to learn how strong your current diversification strategy really is and whether precious metals could help provide more wealth preservation and wealth accumulation benefits.
How Precious Metals Can Fit in Both Wealth Preservation and Wealth Accumulation Strategies
An asset class with the ability to play a role in wealth preservation, wealth accumulation, risk management, and diversification is ideal. And precious metals have the potential of covering all those bases.
Acquiring precious metals has long been regarded as a way to “store” wealth. And though the price of precious metals can rise or fall, as you can see on the U.S. Money Reserve gold price chart, decades of data reveal that over the long term, precious metals tend to appreciate. Because the prices of gold and other precious metals aren’t tied to the performance of the markets and global economy, precious metals can provide diversification with enhanced risk management.
A precious metals IRA can also provide individuals with the same tax benefits and potential to grow wealth that you’ll find with a conventional individual retirement account. The key difference is alternative assets such as gold and platinum can be used to fund the account. You also have more control over your asset allocation with a precious metals IRA since it is self-directed. Maintaining wealth can involve a number of financial strategies, and those strategies may need to be adjusted over time. Request a free Precious Metals IRA Kit to discover how precious metals can be used as an additional financial strategy that supports wealth preservation and wealth accumulation.