Have you ever wondered how some people manage to accumulate fortunes throughout their lives, while others, despite their efforts, see their money disappear due to external factors?
Wealth preservation is not just about accumulating money, but also about protecting it, growing it safely and ensuring its longevity. This involves focusing on risk mitigation and loss protection through strategies such as asset diversification, inflation management and tax reduction.
In this article, we will explore some of the most effective approaches to protect your wealth and mitigate financial risks.
The threat of inflation and currency depreciation
Inflation is one of the biggest threats to wealth preservation, as it erodes the purchasing power of money over time. It acts like an invisible force that can diminish your assets, especially if you don't take steps to protect them. Even with a high income or investments, if your returns don't outpace inflation, you risk losing real value.
You can find more detailed information about how to protect yourself from inflation in this article .
Inflation in the European Union has varied significantly in recent years. In October 2022, it reached a peak of 11.5% , but by November 2024, it had dropped to 2.3%. This volatility not only affects the prices of everyday goods but also directly impacts the value of money held in savings. For example, $2,000 today may not have the same purchasing power in five years if inflation outpaces the returns on your investments.
Strategies to protect your wealth from inflation
To effectively protect your wealth from the threat of inflation, it's crucial to consider investment strategies that can help preserve or even increase the value of your assets over time. There are several options available that can act as a hedge against it and ensure your purchasing power remains intact, despite rising prices. Some of the most effective strategies include:
- Government Bonds Indexed to Inflation: Several European countries offer inflation-linked bonds that are excellent options for protecting purchasing power during periods of high inflation.
For example, France issues Obligations Assimilables du Trésor (OATi), linked to French inflation, and OAT€i , tied to eurozone inflation. Similarly, Italy issues BTP€i bonds (Buoni del Tesoro Poliennali Indicizzati), designed to preserve purchasing power by linking returns to the HICP. These instruments are a reliable way to shield investments from inflationary pressures, ensuring stability in real value over time.
- Real Assets: Investments in tangible assets, such as property and commodities, often preserve or even increase their value during inflationary periods. For example, the average property value in the UK rose from £176,000 in 2007 to £288,000 in 2024 , an increase of around 63%, which outpaced inflation over the same period. However, it's important to be mindful of market fluctuations and associated transaction costs.
According to iShares, the performance of three asset classes — equities, fixed income, and commodities — varies in different inflation scenarios. During periods of falling inflation, commodities tend to underperform, but they often stand out during inflationary periods.
Source: iShare
In fact, in an environment of rising inflation, commodities tend to appreciate as investors seek assets that preserve their real value. Since inflation erodes the purchasing power, commodities like gold and oil are seen as a natural hedge against this devaluation. Additionally, their demand tends to rise as the prices of goods and services increase, further driving up the prices of these raw materials.
Protecting against inflation is crucial, but wealth preservation also requires attention to tax rates, which can reduce a substantial portion of your returns, especially in the long run.
The impact of taxes on wealth preservation
Taxes are one of the biggest enemies of wealth preservation. In Europe, income tax rates vary widely, and in many countries, they can significantly reduce the returns on investments, especially profits from selling assets such as stocks, property, and bonds.
For example, Denmark and France have some of the highest personal income tax rates in Europe, with rates of 55.9% and 55.4%, respectively. On the other hand, countries like Bulgaria (10%), Estonia (20%), and the Czech Republic (23%) have lower rates.
The progressive tax system, where higher income brackets are taxed at higher rates, can erode a substantial portion of your investment gains. To minimize the impact of taxes on your wealth, it is essential to understand how tax systems vary and apply strategies that can reduce your tax burden across different European jurisdictions.
Strategies to minimise taxes
One of the most effective ways to minimise tax on your investments is to take advantage of tax-efficient accounts:
- Tax-Advantaged Investments: Some countries offer tax advantages, allowing investors to maximise returns by reducing the tax burden on income. In the EU, nations like Denmark and the Netherlands have no withholding tax on interest, aiding wealth growth, while Germany and the UK impose taxes but provide credits to reduce liabilities.
These instruments are essential for optimising the growth of savings, particularly when considering the differences in tax rates across countries. Furthermore, efficient dividend taxation, as seen in Ireland and Spain, also mitigates double taxation, making these accounts attractive for long-term investors.
- Pension: In many European Union countries, contributions to pension funds are tax-deductible, allowing individuals to pay less tax in the present. Additionally, investments within pension funds are generally tax-exempt, allowing untaxed growth during the accumulation phase.
Fluctuating capital gains tax rates not only affect individuals, but also have a broader impact on the economy. As shown in the graph below, data from the U.S. Department of the Treasury Office of Tax Analysis reveals an inverse relationship between capital gains tax rates and GDP growth, suggesting that higher taxation may slow the growth of collective capital.
Diluting risk between different asset classes
Protecting your capital is not just about dealing with tangible risks, but also about preparing for the unexpected. Diversification is one of the most effective strategies for reducing the risk of big losses and increasing the chances of preserving your wealth in the long term.
By spreading your investments across different asset classes, such as equities, bonds, property, and commodities, you can balance risks and ensure a stable source of growth. Stocks, for example, offer high potential returns but come with greater volatility. Bonds offer greater safety and predictability, while property and commodities, like gold, are known to provide protection against inflation and economic downturns.
Below is an example of a balanced portfolio, featuring various asset classes, including uncorrelated assets with different liquidity and risk levels.
Additionally, cryptocurrencies, especially Bitcoin with its limited supply, have become an innovative option for portfolio diversification, providing a natural hedge against the depreciation of fiat currencies (unlike the traditional system, where governments often print money to support their economies).
Moreover, some cryptos have outpaced inflation and offer opportunities for tax-efficient strategies. As a result, they have become a key element in wealth preservation strategies, providing both protection and growth potential.
Below, you can see the returns that Bitcoin has delivered over the last 10 and 5 years, as well as last year:
Source: Curve
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Conclusion
Today, the range of information and options for capital protection is vast, extending well beyond traditional assets like fixed income and property. With the evolution of financial markets, there are now opportunities not only to grow your wealth more efficiently and strategically, but also to safeguard it.
While inflation and rising taxes continue to pose significant threats, they are not overwhelming. By adopting smart strategies, such as effective tax management, you can minimise these risks.
Ultimately, the key to protecting and expanding your wealth lies in leveraging the diverse options available, whether through traditional assets or innovative solutions like cryptocurrencies. A well-diversified portfolio, tailored to the current economic landscape, ensures that your capital remains protected and grows sustainably, even in times of uncertainty.
