Are wealthy people really immune to an economy that falls into recession?

Escribo a menudo en Quora.com, donde soy el escritor más visto sobre temas financieros, con más de 422,4 millones de visitas en los últimos años.

En las respuestas que figuran a continuación me he centrado en los siguientes temas y cuestiones:

• Are wealthy people really immune to an economy that falls into recession or worse, a depression?
• What country is considered to be really developed by foreigners but it actually isn’t?
• Why do rich people diversify their investments?

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Are wealthy people really immune to an economy that falls into recession or worse, a depression?

If you look at the wealthiest people ever adjusted for inflation, you find that most were either emperors who lived hundreds of years ago or accumulated their wealth before the Great Depression and World War 2

It is different to estimate how much people like William the Conquerer were worth, but people like Ford, JP Morgan and Rockefeller were alive much more recently.

On most measures, they were wealthier than today’s super-rich.

They did well in numerous recessions, but two or three unexpected events, like the most major economic depression ever, World War 2 and very high taxes, destroyed plenty of that wealth.

Likewise, if we look at recent times, it is a myth that the “rich” usually get richer during recessions.

Inequality fell during the worst 2008–2009 crisis because asset prices were lower and took longer to recover. It only started to climb a few years later during the recovery.

Likewise, during Covid-19, during the worst of the stock market crash, many wealthy people’s paper fortune plummeted until the stock market recovery.

Even then, only wealthy people in areas like technology benefited, not those in airlines and hospitality.

What is true, however, is that:

1. Some of the most significant long-term fortunes are made during bad times. Some of the biggest firms in the world were created during the Great Depression of the 1930s. Likewise, there was a bit of a “changing of the guard” in finance when upstart firms like Revolut challenged the traditional banks after the Global Financial Crisis. That doesn’t mean that the same people always make those great fortunes. Recessions and depressions are often better for a challenger rather than established companies.
2. Shallow recessions and regional-specific ones aren’t the same as a global depression. An international, online company won’t be affected much by a downturn in a single country or region if revenue is diversified.
3. Asset prices are lower during these periods, which brings about opportunities, but at the same time, business earnings can come under pressure.

The longer and deeper the bad time roll, the more difficult it is for anybody to be completely immune.

The Great Depression followed by World War 2 is such an example. That period went on for so long that few people were completely immune.

Let’s not forget as well that inheritance destroys wealth as well. The dilution effect of spreading around the wealth, inheritance taxes and the poor decisions of many inherited wealthy has had an enormous impact long-term.

There are fewer than 2,000 billionaires globally. Some studies have shown that there could be over 120,000 today if these inherited wealthy people had made different decisions.

That is one reason why the trust industry has grown. Many wealthier people don’t want their offspring to have direct access to all the money.

Why do rich people diversify their investments?

It isn’t just richer wealthier people.

Anybody with sense diversifies. It doesn’t make sense to put all your eggs in one basket.

Anything can happen to one business – including your own and those listed on the stock market.

The general stock market has done so well for over a hundred or more years, yet how many stocks have fallen to zero like Lehman or decreased by 80%, never to return to previous highs?

How many family-run businesses have been going “forever”, but went out of business due to Covid-19 or whatever other reason?

That isn’t to mention the following facts:

• That diversifying can also be a way to not rely on your health. That older person who has made their fortune from their business might suddenly worry about what would happen if something happens to their health if they fail to diversify into other investments.
• We can’t control politics or many other things to any significant degree, so having all your assets linked to one country’s fortunes doesn’t make sense.
• Liquidity. Some investments are more portable and liquid. Businesses and real estate can’t be sold easily or just moved quickly if you start to feel uneasy about the local environment.
• If volatility worries you, which it shouldn’t if you are young, you should want to own uncorrelated assets, meaning some investments in your portfolio will rise when others fall.
• Even if you prefer one asset class, like stocks, that doesn’t mean you shouldn’t diversify between regions. The Total Stock Market Exchange and the Total International Stock Market Exchange track thousands of firms globally, meaning it doesn’t matter if one region’s stock market goes to zero, like what happened in the Soviet Union or China in 1949 after the communists came to power, or Syria more recently.
• Diversifying between company size also helps during extreme moments like the Great Depression, when smaller stocks vastly outperformed the major stock market. Or look at the UK recently. The FTSE250, which has more medium-sized firms, has done much better than the FTSE100.

The critical question is when to diversify. Being narrow and focused can be fine when you are young and if you are a business owner.

Eventually, everybody has to diversify if they want to lower risks.

That doesn’t mean you need to over-diversify, but relying on one thing forever never makes sense.

What country is considered to be really developed by foreigners but it actually isn’t?

This is the future, you know. So said many people who visited Moscow in the 1930s.

Many people also said the same about 1980s Japan.

That is probably because they and most people reading this, are probably not sensibly defining development.

According to a widely held definition, developed means “advanced economically and socially”.

Many people get confused about this. For example, Rob below said, “Shanghai and Guangzhou are the future. They are more developed than any city in Europe or North America”.

This simply isn’t true on most measurements.

Zurich looks like this:

Guangzhou looks like this:

Does that mean that major cities in Switzerland, where average salaries are $120,000 on some measures, are less developed than a place like Guangzhou, with average incomes of about $25,000?

Of course not. Any government that cares about keeping face can build loads of tall buildings and make the city look developed to outsiders.

What are more, countries which are less developed have the latecomer advantage. What do I mean by that?

In a fully developed country like Japan or Switzerland, it is more challenging to get people to change habits.

Why would the average Swiss person, who is most likely happy with their banking system and already high levels of efficiency, want to move quickly towards mobile money?

Whereas, in 2010, China or Kenya, there was a clear incentive. Many people couldn’t get credit cards.

I met many people in China who never owned a Visa or MasterCard, so they skipped over technology, and used mobile banking:

Same in Kenya with M-Pesa, which is very impressive:

At least in some parts of the city, Nairobi also looks close to Shanghai in terms of tall skyscrapers.

Does that mean that a country with a GDP per capita of about $1,800 a year (Kenya) and $10,500 (China) is more developed than, say Switzerland or Monaco ($190,000), just because those places don’t use much mobile banking and have a lack of tall buildings?

Of course not. In much the same way that smaller firms are more innovative than established huge companies, smaller, poorer or mid-income countries are more likely to be more innovative rather than developed.

So, it depends on how people define development. If they determine it wrongly as “looking flash”, they will think that Shanghai is more developed than Monaco and be disappointed in Tokyo, London, big cities in Canada etc.

Suppose they more correctly define it as good incomes adjusted for cost of living, low levels of crime and an advanced democratic political system.

In that case, they will be disappointed by some of the poorer regions of places like Guangzhou, where you can see plenty of people living on $250-$300 a month.

These days, I would say people overestimate how developed China and Japan are, for different reasons.

People think Japan is very developed, and it is, in terms of the correct way of looking at development – it is democratic, polite, has low levels of crime, reasonable incomes etc.

But if you are looking for flashy tech, and your image of Japan is still stuck in the 1980s “high-tech society”, then most of the country will disappoint you.

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Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.