Lessons in Wealth Management:
Creating, Growing, & Managing Your Wealth

By Jim Hagedorn, CFA & Richard Grant

September 21, 2018

This is the introductory article to a weekly series on how to create, grow and manage your wealth. Future articles will delve deeper into the characteristic of the US economy and tools and techniques to help you better budget, save, spend and invest. The series will provide insights into how to afford the big-ticket items - college, home and retirement. Investing is a critical factor in growing and managing your wealth. We will discuss various types of investments and concepts such as risk tolerance, asset allocation, diversification, rebalancing and dollar cost averaging. Your own financial literacy is critical as you create, grow and manage your wealth. However, help from an investment advisor or financial planner can also be a critical factor in your journey to financial freedom. We will examine in detail when you should pursue these resources and how to find the best advisors for you.

Creating, Growing and Managing Your Wealth

Even if you have won the lottery or received a significant inheritance, it pays to understand the basics of creating, growing and managing your wealth. You must become financially literate. The reason is simple. If you are financially literate you will make informed judgments and effective decisions about managing your money. Knowledge is requisite for doing things like saving money for your kids to go to college, buying a home, or planning your retirement. To presume the salary you’re making today will prove sufficient in empowering you to do these things is shortsighted. First, you must acquire the knowledge; then you must use your knowledge proactively.

To do that, however––to understand how wealth management works––you must understand how the economy works.

That’s where we’ll start.

The Economy & the Multiplier Effect

The economy is a machine, and its functioning comprises the foundation atop which individuals and businesses create, grow and manage wealth. It's all about money being made and money being spent. Many different types of transactions make the economy. To illustrate, let’s use a company we all know - Apple. Apple is a public company which means their stock and bonds are freely tradeable in the public markets. Private companies are not freely tradeable in the public markets.

Apple is in many different businesses, one of which is creating, manufacturing and selling iPhones.  To manufacture an iPhone, Apple must purchase the materials needed to build it. The iPhone case is made of aluminum and sapphire glass. The battery is made of cobalt, graphite, lithium and aluminum. The screen includes rare earth metals like indium and tin. You get the picture.

A variety of companies supply the component parts. All these companies employ people to produce their products and get them to market. In this case, the market is Apple. Every one of those companies is generating revenue from sales to Apple and paying their employees for their hard work. Then Apple uses these component parts to manufacture the iPhone and deliver them to their customers. Apple generates revenue on the sale to their customers and incurs costs for components and labor to manufacture the iPhone.

All the employees of Apple and their suppliers then spend the money they made in their local communities to buy groceries, hire an accountant, do improvements on their home or have their house cleaned. All these transactions contribute to the economy as money is made and money is spent. Each additional iPhone manufactured and sold impacts the economy each time money is spent. This is called the multiplier effect. As all these companies grow sales and profitability, there is economic growth.

Economic Growth: Created & Measured

Economic growth is measured by the gross domestic product (GDP) of a country. GDP is the total value of goods and services produced within a country over a period. An increase in GDP is the increase in a country’s production.

There are many factors which contribute to creating economic growth in a country or region. They include: the availability of natural resources, increased investment in physical capital like factories, machinery and roads, an increasing population of workers and investing to improve the skills of the workforce, improvements to technology, and legislation which promotes economic activity.

For example, economic growth is a function of employees fueling the economy with productivity. Increased productivity of workers, either through technology or a lower unemployment rate results in economic growth. This is one reason why the U.S. economy is growing right now. We have more workers contributing more meaningfully in their respective fields.

Now, your question likely is: but what does economic growth have to do with creating, growing and managing your wealth?

The Economy's Impact on Investing

When the economy is doing well, more people have enough money not only to buy what they need, but also to purchase what they want, and save or invest the remainder. When the economy is growing, there is more money available for investment and your current investments are more likely to be increasing in value.

Individual investors, based upon many factors, decide what type of investments they should make. Investors might select stock or bond mutual funds, exchange-traded funds, commodity funds, individual stock or bonds or any one of many alternative investment products available.

Let’s once again look at Apple. Apple has stockholders who provided the capital necessary to grow their business. Those stockholders expect a positive return on their investment. When the company’s stock is worth more today than the day it was purchased, a positive return is realized. Apple also has bondholders who lent the company money to help them grow the business. The purchaser of these bonds make money by receiving interest from Apple for the use of their funds.

As the economy grows it is more likely Apple will become more profitable and the value of their stock will increase in value. If this occurs, it becomes more difficult for Apple to sell their bonds rather than their stock. Therefore, they will need to increase the interest rate the investor will earn to attract money away from stocks into bonds.

Investors' Goals & Objectives

An investor should prepare their own analysis or evaluate analysis prepared by analysts before investing in a company’s stocks and bonds. The analysis should include both company fundamentals and the fundamentals of the broader economy.

Company analysis will use revenue, earnings, return on equity, profit margins, estimated growth and other data. This data helps to determine the underlying value of the company and prospect for future growth.

The economic analysis should consider things at the macro level such: as the global and individual country growth rates, geopolitical tensions, trade wars and trends. In addition, such analysis should include a more in-depth view at an individual country level such as: interest rates, inflation and employment trends.

There is no right answer on how investors should do their analysis. Every approach has its pros and cons. The key to becoming a successful long-term investor will be to find a system that fits your goals and objective.  That is the purpose of our weekly series - to help you become financially literate and find the right tools and techniques for creating, growing and managing your wealth.

Jim Hagedorn, CFA is the Managing Partner of Chicago Partners Wealth Advisors. He and Anthony founded Chicago Partners in 2008 with the vision of helping individuals optimize the management of their wealth.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.

September 21, 2018

This is the introductory article to a weekly series on how to create, grow and manage your wealth. Future articles will delve deeper into the characteristic of the US economy and tools and techniques to help you better budget, save, spend and invest. The series will provide insights into how to afford the big-ticket items - college, home and retirement. Investing is a critical factor in growing and managing your wealth. We will discuss various types of investments and concepts such as risk tolerance, asset allocation, diversification, rebalancing and dollar cost averaging. Your own financial literacy is critical as you create, grow and manage your wealth. However, help from an investment advisor or financial planner can also be a critical factor in your journey to financial freedom. We will examine in detail when you should pursue these resources and how to find the best advisors for you.

Creating, Growing and Managing Your Wealth

Even if you have won the lottery or received a significant inheritance, it pays to understand the basics of creating, growing and managing your wealth. You must become financially literate. The reason is simple. If you are financially literate you will make informed judgments and effective decisions about managing your money. Knowledge is requisite for doing things like saving money for your kids to go to college, buying a home, or planning your retirement. To presume the salary you’re making today will prove sufficient in empowering you to do these things is shortsighted. First, you must acquire the knowledge; then you must use your knowledge proactively.

To do that, however––to understand how wealth management works––you must understand how the economy works.

That’s where we’ll start.

The Economy & the Multiplier Effect

The economy is a machine, and its functioning comprises the foundation atop which individuals and businesses create, grow and manage wealth. It's all about money being made and money being spent. Many different types of transactions make the economy. To illustrate, let’s use a company we all know - Apple. Apple is a public company which means their stock and bonds are freely tradeable in the public markets. Private companies are not freely tradeable in the public markets.

Apple is in many different businesses, one of which is creating, manufacturing and selling iPhones.  To manufacture an iPhone, Apple must purchase the materials needed to build it. The iPhone case is made of aluminum and sapphire glass. The battery is made of cobalt, graphite, lithium and aluminum. The screen includes rare earth metals like indium and tin. You get the picture.

A variety of companies supply the component parts. All these companies employ people to produce their products and get them to market. In this case, the market is Apple. Every one of those companies is generating revenue from sales to Apple and paying their employees for their hard work. Then Apple uses these component parts to manufacture the iPhone and deliver them to their customers. Apple generates revenue on the sale to their customers and incurs costs for components and labor to manufacture the iPhone.

All the employees of Apple and their suppliers then spend the money they made in their local communities to buy groceries, hire an accountant, do improvements on their home or have their house cleaned. All these transactions contribute to the economy as money is made and money is spent. Each additional iPhone manufactured and sold impacts the economy each time money is spent. This is called the multiplier effect. As all these companies grow sales and profitability, there is economic growth.

Economic Growth: Created & Measured

Economic growth is measured by the gross domestic product (GDP) of a country. GDP is the total value of goods and services produced within a country over a period. An increase in GDP is the increase in a country’s production.

There are many factors which contribute to creating economic growth in a country or region. They include: the availability of natural resources, increased investment in physical capital like factories, machinery and roads, an increasing population of workers and investing to improve the skills of the workforce, improvements to technology, and legislation which promotes economic activity.

For example, economic growth is a function of employees fueling the economy with productivity. Increased productivity of workers, either through technology or a lower unemployment rate results in economic growth. This is one reason why the U.S. economy is growing right now. We have more workers contributing more meaningfully in their respective fields.

Now, your question likely is: but what does economic growth have to do with creating, growing and managing your wealth?

The Economy's Impact on Investing

When the economy is doing well, more people have enough money not only to buy what they need, but also to purchase what they want, and save or invest the remainder. When the economy is growing, there is more money available for investment and your current investments are more likely to be increasing in value.

Individual investors, based upon many factors, decide what type of investments they should make. Investors might select stock or bond mutual funds, exchange-traded funds, commodity funds, individual stock or bonds or any one of many alternative investment products available.

Let’s once again look at Apple. Apple has stockholders who provided the capital necessary to grow their business. Those stockholders expect a positive return on their investment. When the company’s stock is worth more today than the day it was purchased, a positive return is realized. Apple also has bondholders who lent the company money to help them grow the business. The purchaser of these bonds make money by receiving interest from Apple for the use of their funds.

As the economy grows it is more likely Apple will become more profitable and the value of their stock will increase in value. If this occurs, it becomes more difficult for Apple to sell their bonds rather than their stock. Therefore, they will need to increase the interest rate the investor will earn to attract money away from stocks into bonds.

Investors' Goals & Objectives

An investor should prepare their own analysis or evaluate analysis prepared by analysts before investing in a company’s stocks and bonds. The analysis should include both company fundamentals and the fundamentals of the broader economy.

Company analysis will use revenue, earnings, return on equity, profit margins, estimated growth and other data. This data helps to determine the underlying value of the company and prospect for future growth.

The economic analysis should consider things at the macro level such: as the global and individual country growth rates, geopolitical tensions, trade wars and trends. In addition, such analysis should include a more in-depth view at an individual country level such as: interest rates, inflation and employment trends.

There is no right answer on how investors should do their analysis. Every approach has its pros and cons. The key to becoming a successful long-term investor will be to find a system that fits your goals and objective.  That is the purpose of our weekly series - to help you become financially literate and find the right tools and techniques for creating, growing and managing your wealth.

Mark F. Toledo, CFA is a Partner at Chicago Partners Wealth Advisors. He has been a wealth manager for over 35 years and has helped hundreds of individuals and foundations create better wealth management solutions.


Important Disclosure Information

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Chicago Partners Investment Group LLC (“CP”), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from CP. Please remember to contact CP, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. CP is neither a law firm nor a certified public accounting firm and no portion of the commentary content should be construed as legal or accounting advice. A copy of the CP’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request.