It's not easy being rich. Times may be tough for the ordinary man in the street - what with fast-rising mortgage rates, record levels of personal debt, the pensions crisis, the ever-rising tax burden and so on - but according to a report on private banking I have been forcing myself to read this week, life's not exactly a bag of peaches for the super-rich either.
Why? Because there are now so many rich people knocking around that the competition for luxury goods from public school educations to Andy Warhol prints is really hotting up.
According to the most recent World Wealth Report from Merrill Lynch and Capgemini there are now 9.5m people around the world considered to be of high net worth (they have more than US$1m in financial assets not including their houses), 11.4% more than there were last year. Half a million of these live in the UK. Further, there are 95,000 people in the world considered to be ultra high net worth' (that's super-rich to you and me - they have financial assets of $30m or more). This is 10,000 more than there were last year.
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The reasons for this massive rise in wealth are well known. Stock markets have been doing well; the hedge fund sector with its millionaire-making fees has been expanding at speed; softer interest rates and friendly tax regimes have made fortunes for anyone brave enough to get into private equity or any of the many global property bubbles; and, of course, the high oil price has meant money has been pouring into the economies of the Middle East.
This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
The thing about rich people is that they all want the same things they want boats, champagne, opera tickets, face lifts, helicopters, private jets (the study notes that Boeing has recently taken 11 orders for wide bodied private jets, all of which are being customised as "mobile mansions"), pairs of Purdey shotguns, 8 bedroom houses in Belgravia and the smartest suite at Claridges to hang out in while said house is being renovated by Candy and Candy. The problem is that there aren't quite enough of all these things to go around, something that inevitably pushes their prices up.
Forbes magazine has been tracking the inflation rates suffered by the super-rich via itsCost of Living Extremely Well Index (CLEWI), which measures the cost of a basket of 42 luxury goods, for some time now. A quick look at the trend makes the sufferings of the super-rich clear: last year the CLEWI rose by 7%, with the price of things favoured by the newly rich (motor yachts for example) rising particularly fast, and since 1979 the CLEWI has risen at an average annual rate of 6.9%. Over the same period the Consumer Price Index (which measures the price of most of the things that ordinary people buy) has risen by only 4.3% a year.
The interesting point about this is that it makes it impossible for the well-off to invest defensively if they want to maintain their standard of living. On average the return on cash since 1979, according to HSBC, has been 6.3% before cash. So even those who somehow manage to pay no tax on their assets (by having their accountants declare them UK non doms perhaps) will have lost purchasing power over the last few decades if they have kept their money in cash. And those paying tax, should there be any among the super-rich, will have lost a great deal of purchasing power.
Wealthy families, says HSBC, "must on average grow their assets faster than families whose consumption patterns are more in line with the basket of goods that is included in the CPI." If you want to preserve your wealth, holding cash "is not sustainable in the longer term." Instead the rich have no choice but to maintain "their hard earned prosperity through proper diversification" and if they want to have a chance of continuing to impress the rest of us with their toys to take real risks as they do so.
This is particularly the case today given that there is bound to be a major backlash against the low taxes paid by the super-rich relative to those paid by the rest of us in the not too distant future. And the more tax you pay the harder it is to net the 7% you need to hang on to your ultra high net worth.
This explains all sorts of things. It explains why the rich keep pouring their money into hedge funds and odd foreign property markets. It explains why the Chinese stock markets keep rising. And it goes some way to explaining the bonkers nature of today's art market. In the last few weeks a Monet of Waterloo Bridge has sold for £18m, twice its estimate; a Warhol print has sold for $71.5m; and a Lowry bought in 1959 for £3000 has fetched just over £600,000 (making its owner an annualized return of about 16%). In the art market, I am told, $20m is the new $1m.
I went to a wealth management conference a few weeks ago. Mixed in among speakers discussing various aspects of real investment there was an art expert. Buy what you like and buy now, she said and "I can promise you won't regret it." I wonder. Anyone who had bought a Monet or Lowry 40 years ago clearly hasn't regretted it but there would have also been a great many people who bought paintings at the same time, which are of no interest to anyone today. They haven't made 16% a year on their investments.' They've made nothing.
Scattered all over Japan are private art museums' built up by the super-rich of the 1980s as status symbols. They are full of things wealthy Japanese liked then and no one can even be bothered to turn up and look at today, let alone think about buying. I'm not sure this would be the kind of diversification HSBC has in mind. Art isn't really an investment, it's a hobby, and when prices are as high as they are at the moment it's a very dangerous hobby.
This article is taken from Merryn Somerset Webb's free weekly personal finance email, Money Sense. Click here to sign up now: Money Sense
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