Introduction

With the double-whammy of falling home prices and a major bear market in stocks, and a global credit crisis on top of that, it is not surprising that the number of millionaires in the US and around the world plunged last year.

An interesting new report out last week from Capgemini (a global consulting firm) and Merrill Lynch found that the ranks of the world's millionaires shrank at the fastest rate ever in 2008, with North America suffering the biggest wealth loss worldwide.

The Capgemini/Merrill Lynch annual "World Wealth Report" notes that the global slump in property and equity markets last year cut the number of millionaires by 15% to 8.6 million, wiping out two years of increases. The value of the world's millionaires' assets fell 20% to $32.8 trillion, after a 9.4% increase in 2007, according to the latest report.

Millionaires' Club Shrank at Record Rate in 2008

The Capgemini/Merrill Lynch World Wealth Report for 2008, which was released last Wednesday, defines a millionaire as someone with a net worth of $1,000,000 excluding the value of their primary residence, collectibles, consumables, and consumer durables (ie – liquid assets). The survey is conducted globally each year. The authors use the acronym "HNWI" to represent High Net Worth Individuals who are millionaires, as defined above.

The Report concludes that at the end of 2008, the world's population of HNWIs was down 14.9% from the year before to 8.6 million, and their wealth had dropped 19.5% to $32.8 trillion. The declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007. As a result, the world's population of millionaires and their wealth ended 2008 below levels seen at the close of 2005.

The global population of millionaires had seen robust annual growth of 7.2% on average from 2005 to 2007, before reversing in 2008. The same trend was evident in HNWI financial wealth, which grew 10.4% per year in 2005-07, before the steep contraction.

The most significant declines in the HNWI population in 2008 occurred in the three largest regions: North America (-19.0%), Europe (-14.4%) and Asia-Pacific (-14.2%). But behind the aggregate numbers lie some interesting developments in the HNWI populations of those regions. The authors summarize as follows:

• The number of HNWIs in the U.S. fell 18.5% in 2008, but the U.S. remains the single largest home to HNWIs, with its 2.5 million HNWIs accounting for 28.7% of the global HNWI population.
  
  
• In Europe, the 14.4% decline in the millionaire population varied widely by country. For example, the number of HNWIs shrank 26.3% in the U.K., but just 12.6% in France and only 2.7% in Germany, which avoided a steep contraction in part because HNWIs there were more heavily invested in conservative asset classes than those in other countries.
  
  
• Japan, which accounts for more than 50% of the HNWIs in the Asia-Pacific region, suffered a relatively mild HNWI decline of 9.9%, but others in the region suffered greater losses, including Hong Kong (-61.3%) and India (-31.6%).
  
  The apparent resilience of Japan, however, stemmed largely from the fact that the expansion of the HNWI population there had already been capped by the 2007 slowdown in macroeconomic growth and a weakening stock market (market capitalization was down 11.1% in 2007).

The Capgemini/Merrill World Wealth Report also surveys the globe for the super-rich, those with at least $30 million in liquid assets, which they refer to as the "Ultra-HNWIs." The contraction in the overall HNWI population was exacerbated by the steeper-than-average decline (globally and regionally) in the number of Ultra-HNWIs.

A decline in Ultra-HNWI numbers has a disproportionate effect on overall HNWI wealth, because so much world wealth is concentrated in their hands. The Report notes that at the end of 2008, Ultra-HNWIs accounted for 34.7% of global HNWI wealth, but only 0.9% of the total HNWI population.

Recall as noted above that the entire world population of HNWIs was down 14.9% in 2008, and their wealth had dropped 19.5% to $32.8 trillion. Yet the world population of Ultra-HNWIs shrank and lost even more. The number of Ultra-HNWIs plunged 24.6% in 2008, and their wealth was down 23.9%. This is very interesting!

The Ultra-HNWIs (those with at least $30 million in liquid assets) should have access to the very best in money management, and they should be highly diversified. Yet they lost more numbers and more wealth than the mere millionaires.

The authors suggest that the sharp decline in the number of Ultra-HNWIs globally largely resulted from that group's "partiality for more aggressive products, which tend to deliver greater-than-average returns in good times, but delivered hefty losses in 2008." While this may have been true in some cases, I strongly suspect that the losses occurred primarily because many millionaires (along with average investors) bought into Wall Street's buy-and-hold mantra, and when the stock markets plunged, so did their assets.

It is also true that some of the most highly sought after, high profile professional money managers lost 40% or more last year. And who knows, they may have had money with Bernie Madoff! I would also suggest that the plunge in oil prices last year played a role in the losses among Ultra-HNWIs, many of whom are Middle East oil sheiks.

Finally, I am sure there will be readers who will respond and ask, Why should I care if a lot of millionaires and super-millionaire fat cats took a beating over the last 18 months; after all, I lost a lot of money in the market as well. To that question, I would simply remind everyone that the wealthy create lots of jobs and pay a lot of taxes (top 5% of taxpayers pay over 60% of all income taxes). To that end, their large loss of wealth will have a negative effect on economic growth and the federal budget deficits.

But at the end of the day, what this demonstrates for all investors is that Wall Street's buy-and-hold mantra was a recipe for huge losses over the last 18 months, just as it was during the last bear market in 2000-2002. Perhaps that is why we are seeing a wave of investors seeking actively managed alternative investment strategies such as those I recommend.

.

Conclusions

The bear market in stocks, which saw the S&P 500 Index fall by more than 50% from the peak in late 2007, has certainly inflicted a lot of casualties on the world's millionaires and super-millionaires.

The White House National Economic Council estimates that on a global basis, $50 trillion dollars in wealth has been erased over the last 18 months. This includes $7 trillion dollars in US stock market wealth which has vanished, and $6 trillion dollars in US housing wealth that has been destroyed over that period. These declines were unprecedented, and wiped out two robust years of growth in 2006 and 2007.

In 2008, the world's population of millionaires was down 14.9% from the year before to 8.6 million, and their wealth had dropped 19.5% to $32.8 trillion. The super-millionaires ($30 million or more) fared even worse. The number of super-millionaires plunged 24.6% in 2008, and their wealth was down 23.9%.

.