How to Hold On To Your Wealth

The wealthiest 1% of Americans are the most volatile group in the economy. The wealthiest have trouble maintaining that wealth. From 2007-2009, the total income of the top 1% fell more than 30%, while the average income of the bottom 90% fell less than 3%. Maria Elena Lagomasino, a private banking chief, found that only 15% of the Forbes 400 remained on the list of the wealthiest individuals for over a 21-year period. She reported on the five main reasons that people fall out of their wealth:

1. Overconcentration – betting all of your money on a single company or asset.

2. Leverage – using debt to maximize investment gains, expand businesses, and fund lavish lifestyles

3. Spending – spending exceeds cash flows and returns

4. “Toxic Cocktail” – Betting big, borrowing big on a business, and funding a large lifestyle.

5. Family issues – divorces, family business disputes

The best ways to hold on to your wealth include maintaining a diverse, liquid portfolio of dividend-paying stocks and bonds and cash equivalents. Putting your wealth all in one place is one of the riskiest moves the wealthy can make. It is also prudent to keep debt limited.

For those who bet everything on the companies that they launch, they should regularly sell off small chunks of their stock when their companies go public.

See Robert Frank, The Truth About Wealth: Affluence Is Becoming A Temporary Phenomenon. Here’s How to Dodge the ‘Beta Trap and Hold On To What You’ve Got, The Wall Street Journal, Dec. 17, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.