Despite heated rhetoric, the top 1% is hardly a fixed group. To the contrary, the wealthiest are the most crash-prone. Private-banking chief Maria Elena Lagomasino has studied why so many rich people she knew were blowing up. Entrepreneurs, tech tycoons, real-estate titans, and even CEOs, who were known for their money savvy, would make millions one year and lose it the next. Her report, called “Beating the Odds: Improving the 15% Probability of Staying Wealthy” grouped the factors into five main categories:
- Rapid riches often involve betting big on a tech start-up, real estate, or gold. When those assets boom, the gains are huge. When values decline, they can take an entire fortune with them.
- Debt amplifies gains and magnifies losses. Unexpected changes in the rich’s businesses or incomes can turn manageable debt levels into wealth destroyers.
- Some rich folks’ spending exceeds their cash flows and returns, leaving them one crisis away from a financial collapse.
- The “toxic cocktail.”
- The first three reasons are often linked, with the newly wealthy betting big and borrowing big on a business, then using their paper wealth to fund a large lifestyle. These three factors can unwind at the same time, instantly destroying huge fortunes.
- Family issues.
- These include divorce, inheritance battles, and family-business disputes.
Investors and entrepreneurs may stay wealthy by using new financial tools. They should avoid having more than 20% to 30% of their net worth in a single asset. Limiting debt is also critical to avoiding crashes. Experts say a family’s debt shouldn’t exceed 25% of its assets.
Entrepreneurs who launch companies and bet everything on their success are loath to cash out too soon. Smarter would be to regularly sell off small chunks of their stock as soon as their companies go public. They may be losing some upside, but they are building a critical safety net in case of a fall.
Aside from being the most crash-prone, “How hard it is for those who have riches to enter the kingdom of God!” (Mark 10:23). The WSJ article suggests worldly wisdom for beating the mere 15% likelihood of preserving worldly riches. The Bible gives heavenly insight for 100% success at inheriting The Kingdom. For the Road to Heaven, please visit: www.levitt.com/road.