Why is staying rich important? If you were born poor and have been rich, you know that being poor can be painful. Staying rich is not as simple as many people (with or without money) might believe. If it were easy, we would hear fewer riches to rags stories.
Once you are rich, you are the target for every con artist and charity development officer who can find your address and telephone number. However, the wealthy have other worries. Other obstacles to preserving wealth are expenses, taxes, inflation (the loss of purchasing power is death to many portfolios), poor investments and fraud.
To live you must spend money; most of us spend our money both on essentials and on things that please us. Overall, it is best to plan on spending less than you earn to keep growing your wealth. To stay rich your wealth needs to grow just to stand still. Otherwise, the ever-increasing burden of taxes placed on the rich, price inflation, investment mistakes and the risk of being defrauded will erode your wealth. Bad luck happens even to the smartest investor, just less often.
Most people get wealthy from their own business, real estate or earnings accumulation from their job. None of these endeavors prepares them for investing in financial markets. Typically, investors have an undiversified portfolio of stocks in which a few issues account for more than half of their wealth. As a result, every bear market reduces many of these wealthy folks to relative poverty and eventual obscurity. Silicon Valley is littered with former Internet millionaires from the 2000 stock market collapse who are now struggling to find their “Google.” A generation earlier, the 1972 to 1974 bear market produced the same tragic outcome. In the more recent market declines since 2000, we have seen the collapse of many Wall Street firms and investment losses amounting to trillions of dollars in the portfolios of college endowments, pension funds, 401k plans, and the portfolios of the wealthy and not-so-wealthy.
Lastly, the rich are especially ripe targets for fraud. Hedge fund blow-ups can be devastating. The more frightening cases are outright fraud, in which the hedge funds and other investment products published completely falsified client statements, performance reports and audits. Earlier generations suffered losses in oil wells, cattle ranches, and the “nifty 50” stocks of the 1960’s and 1970’s bull market that investors were told could not fail. No amount of government regulation or surveillance will detect fraudulent behavior until it is too late. The only protection for the investor is to rely on one’s own due diligence and common sense. The best protection for the marketplace as a whole is active short selling. One of the benefits of bear markets is that fraud is exposed. People who commit fraud do not care about filing government reports or registering their products. The wealthy are targets because, like the banks, they have the money (my apologies to infamous bank robber, Willie Sutton). To stay rich, you must guard against fraud, diversify your investments, minimize your investment expenses and taxes and, in the long term, be wary of the erosion of purchasing power.
Consider this scenario: Your doctor tells you that next week, you will go into a coma, but you will awaken perfectly healthy in 25 years. How would you invest your nest egg to ensure your lifestyle upon your return? How would your instructions read? To whom would you entrust your fortune? If this “what-if” situation sounds farfetched, it shouldn’t, really. You may want to retire at age 60. You have a high probability of living until you are 85.
DO YOU WANT TO OUTLIVE YOUR MONEY? Remember, wealth is relative and very personal.
Most high net worth individuals must depend on professional investment advice to stay rich. But how does one choose those professionals? Before hiring an investment advisor, employing a broker or letting someone else take control of your fortune, review our critical pages, Questions to Ask Yourself and Questions to Ask an Investment Advisor or Broker.
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