I don’t help people get rich, I help them stay rich. My job as a wealth manager is to help clients hold on to their wealth and to preserve and grow it to keep pace with inflation. My number one priority is to ensure that money is there to meet their goals, when they are ready to spend it.
There are a lot of ways to get rich. The most reliable way is to spend less than you earn and invest the rest. Repeat consistently for four to five decades, and you are likely to secure a decent retirement. One of my favorite things about being an advisor is hearing the variety of ways people accumulated wealth. I’ve seen and heard it all. Stock-based compensation is a common route, as is building a successful, privately-owned business. Then there are high earning professions such as medicine and law. In some cases, I work with the second or third generation of a family. One of my colleagues spoke to a true Tesla millionaire recently. They really do exist, and a few actually took some gains off the table.
A common theme among wealthy individuals is the realization that money earned easily can be lost just as quickly. There is a healthy fear of making a mistake they will regret. Morgan Housel put this perfectly in his book, The Psychology of Money:
There are a million ways to get wealthy , and plenty of books on how to do so. But there’s only one way to stay wealthy: some combination of frugality and paranoia.
This is not the first time I have referenced that quote from Morgan, and I doubt it will be the last. The truth of the matter is that many Americans have made fortunes in recent years. The current bull market, particularly in popular, high growth stocks, has made millionaires out of employees and investors in these companies. Some of them won’t be able to hold on to it.
Few things compare to the high of making millions off a concentrated bet; whether that bet is on a single stock, building a business, or working for a successful start-up. I imagine the brain responds to this high in the same way it does to addiction. The temptation to chase the next high is all-encompassing. I talk to investors all the time who can’t stop chasing that high.
Getting rich and staying rich are two very different skills. Getting rich is exciting, even thrilling, and often includes lots of risk taking. Staying rich is boring, bordering on mundane. That’s because the only way protect wealth with any degree of certainty is to diversify. Diversification by definition means that parts of the portfolio will always be lagging the rest of the market.
There are tradeoffs to every investment and risk management decision. Stocks historically have outpaced inflation, yet are prone to periodic declines of 30-50%. Bonds provide more stability, but interest rates are painfully low. Cash yields zero today, but nothing beats access to immediate liquidity when it’s needed most.
Looking further down the investment landscape, value stocks have outperformed over the long-run, but experienced a decade of underperformance until the last few months. Growth stocks are the clear winners today, but can retreat at lightning speed when sentiment turns. In hindsight, we all wish we put everything in the S&P and the NASDAQ 100 ten years ago and let it ride. Taking a position in a sector, style, country, region, or fad means you may outperform for a while, but trends do not last forever. Investing styles come in and out of favor. Even Warren Buffett, arguably the greatest investor of all time, has experienced long periods of underperformance. He’s currently in the middle of one.
Then there are the bright and shiny objects that surface in times of euphoria. Today we have Bitcoin, meme stocks, Tesla, ARKK, SPACs, and NFTs. It’s hard not to be distracted watching others take victory laps with their winnings on these trades. I have a rule of thumb for this type of investment – If you can set this cash on a table, light it on fire, and watch it burn without risking your financial plan, then go for it. Gamble a little if you enjoy it. If you win, awesome. But you don’t need shiny objects to stay rich, and the chances of you getting rich this way are less than winning the lottery.
There is a reason that people hire advisors and have hired advisors since the beginning of this human experiment we call money. They hire advisors who will look at their wealth a step removed from the emotions tied to those dollars. Staying rich is not embedded in human nature. It requires a ruthless lack of emotion about that which we hold most dear, our money. We simply were not programmed to take a pot of money, place it at risk to daily fluctuations in value (some severe), while waiting for an outcome decades in the future.