Wealth Erosion

Wealth erosion is the decline of one’s asset holdings over time. It is a natural process that all investors eventually experience, but it is possible to minimize the amount of wealth erosion by diversifying one’s portfolio and making wise investments.

Wealth erosion occurs when an investor’s portfolio loses money through market fluctuations or paying cash out of their portfolio for taxes, fees, and other expenses. The first type of wealth erosion is market fluctuations, and the second is spending money out of the portfolio rather than into it. Markets fluctuate, and investments can lose money in the process. This is called market risk. If a person leaves their money to grow in an investment with little movement or volatility, they will not see any wealth erosion; however, if they tried to time the market or put all their eggs in one basket, like a real estate investment or small-cap stocks than the result could be adverse.

Wealth erosion could also be defined as a fall in the value of money or reduction in the accumulated wealth, i.e., investment funds. There could be many reasons for this. For example, the decrease could be due to more consumption than saving, eroding the purchasing power of the money, high taxation, having a high percentage of fixed income investments than required, etc.