The Truth About the Wealthy

Here is another side to the 1% vs. 99%.  People have to take risks and there are no guarantees that the risk you take will pay off.  With some risks you can lose it all or just a portion while at times risk can pay 10 fold.  the point is that once your wealthy like life, there are no guarantees that you will retain your life.  This piece in the WSJ chronicles that precise point.


For the full read The Truth About the Wealthy

• The total income of the top 1%—or those earning more than $343,000 in 2009—fell by more than 30% from 2007, according to the most recent Internal Revenue Service data. By contrast, the average income of the bottom 90% fell less than 3% during the same period
• A November Federal Reserve study, meanwhile, found that a third of the people in the top 1% in 2007, as measured by wealth, were no longer in the top 1% in 2009.
• On Wall Street, "beta" measures volatility relative to the overall market; a beta of 1.0 signals alignment with the market. Technology and gambling stocks can have betas of 1.5 or more, since they tend to overshoot the market in cyclical ups and downs. Utilities, by contrast, both rise less and fall less than the overall market and usually have betas below 1.0.
• A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison. Economists and wealth managers say the betas of the rich have likely soared even higher in recent months as markets gyrated sharply.
• Lee Hausner, a California-based psychologist who works with the ultrarich, has one client she calls "The Phoenix," a real-estate developer and investor who borrowed and spent heavily. He has surged and crashed twice over the past decade, reaching a net worth of $400 million, losing it, then hitting $200 million and losing it again.

A report by Maria Elena Lagomasino commissioned when she was at by JP Morgan Private bank called "Beating the Odds: Improving the 15% Probability of Staying Wealthy" found that only 15% of the Forbes 400 stayed on the list over a 21-year period. (Deaths accounted for less than a third of the drop-offs.)  The report also points out the following;

• Overconcentration. The path to rapid riches for many of the wealthy involves betting big on a single company or asset class, whether it is 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.
• Leverage. Debt has become the rocket fuel for lifting the rich into another financial orbit, amplifying gains and magnifying losses. In recent years, the wealthy have been using more debt than ever to maximize their investment gains, expand their businesses and fund their lifestyles Yet unexpected changes in their businesses or incomes can turn manageable debt levels into wealth destroyers.
• Spending. Even among the more-restrained wealthy, "some of these folks really don't have a clue how much they are spending," Ms. Lagomasino says. Many look at their paper net worth and assume they can afford that private jet or fourth home. Yet their spending often 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. When these three factors unwind at the same time, often forcing the rich to sell at distressed prices, they can instantly destroy huge fortunes.
• Family issues. These include divorce, inheritance battles and family-business disputes.