Friday, June 23, 2006

Getting to Ultra HNWI status

OK, so I am in fantasy land here but after reading the Gapgemini Merrill Lynch World Wealth Report, I started wondering just what it would like to join the 85,400 world wide members of the Ultra HNWI club. The price of admission is financial assets of at least US$30 million. I am probably not alone in thinking that this is a staggering sum of money for the average person to aspire to, but 0.0000128% of the world's population got there. How?

There is a degree of speculation to this, but my expectation is that most of the Ultra HNWIs made their money in one of five ways:

1. Inheritance: unfortunately, I chose the wrong parents for this purpose (for other purposes I made a pretty good selection);
2. Employment: most of the people in this category will be corporate ceos, investment bankers and fund managers (any others?). Only a tiny portion of the workforce will earn enough. Unfortunately, a quick look at my current pay and future prospects suggests that this is not likely to get me there prior to my intended retirement date (or at any other time);
3. Entertainment: TV, movies, music, sports and a few other activities. People falling into this category generally possess exceptional talent or some other rare attribute that I am sadly lacking;
4. Business: people who own their own business. Not sure what to say about this one other than that I don't see myself owning my own business;
5. Investment: its possible but instinctively I assumed that the returns on investment would have to be materially above the long run market average.

I ran two scenarios to see how hard it would be to achieve Ultra HNWI status in real terms under 2 (Employment) and 5 (Investment). Both assume inflation at 3%.

Scenario #1 - the diligent saver

A person enters the work force at age 20, saves $5,000 pa increasing at a nominal rate of 5% and earns 11% on her investments (roughly the long run return on stocks). How many years will it take before she becomes an Ultra HNWI? Answer: in nominal terms, it would take 57 years (worth about $5.7 million after adjusting for inflation). In real terms it would take 79 years.

Conclusion: most of us will run out of time before we get there by saving and investing.

Scenario #2 - starting rich

A person starts out as an entry level member of the HNWI club with assets of $1 million. If we assume that he earns 11% on his investments and ignore savings, how long will it take to achieve Ultra HNWI status? Answer: in nominal terms, it would take 33 years (worth about $11.8 million after adjusting for inflation). In real terms it would take 46 years.

Conclusion: even for the already rich, promotion to the Ultra HNWI division takes a long long time.

Now back to reality.


makingourway said...

the inheritence model might work bettter for the children of savers that don't make it into the hnwi catetory.

i for one am not only putting money away for my children's future schooling, but also in their retirement accounts.

imagine how helpful an additional 21 years would be to your retirement investments?


traineeinvestor said...

Given that most students emerge from university with debt, the reality is that by starting to put money aside for their education and retirement from birth gives them more than a 21 year head start. But definitely, the benefits of an extra 21 years of compound returns would be amazing. The only thing I would worry about is that it may take away some of the children's motivation if they know that their future is taken care of.

As long as we are both working, our savings are going towards our general investments which can be used for any purpose (retirement, children's education etc) as and when we wish. It gives us maximum flexibility (unlike the US tax considerations are negligible for us in Hong Kong). Once we are closer to retirement we will revisit and see if a designated account may be a better option.

Anonymous said...

I think a combination of income from employment, business ventures and investment returns can possibly launch one into the ultra HNWI status.

Your assessment of a 33 years period for 11% return on investment of 1 million to become an uHNWI is sobering.

I see that you are heavily invested in the real estate market. Given the high potential for a housing crash, do you think it is too risky?

Adventures In Money Making said...

while the stock market only returns 8-10% in the long term, HNWIs usually figure out a way to get much higher returns with leverage.
I have personally gotten 1400% returns (75k profit on a 5k investment over 18 months). No doubt, its not easy to scale these numbers, but getting 18-24% return while difficult is not impossible.

at 24% return, you're making 30million in under 30years (starting with a 100k)

Anonymous said...
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Unknown said...

I came to know some HNWI as I mostly deal with bosses.

They really can roll their money faster than you can imagine. Real property remain their favorite past time and fixed deposit. No wonder all around the world property price up like no body business.