The Truth About Wealth
Who says the rich always get richer?
Despite heated rhetoric emanating from politicians and pundits, the top 1% is hardly a fixed group that enjoys consistent income gains. To the contrary, the wealthiest have become the most crash-prone group in our economy.
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.
The good news: Despite the turbulent new economics of wealth, there are safeguards that the rich and future rich can deploy to cushion the shocks and mitigate their risks.
The wealthiest have likely recouped some of their sunken fortunes since 2009, along with financial markets. Yet the latest wave of data points to an indisputable trend—we have entered the age of “High-Beta Wealth.”
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.
Illustration by M.K. Perker
The new rich have become the high-betas of our economy. With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population.
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.
“Being a high-beta in today’s environment is different from being a high-beta in the ’80s or even the ’90s,” says Craig Rawlins, president of Harris myCFO Investment Advisory Services, which serves wealthy families. “People are more susceptible to making bad decisions than they’ve ever been. There is higher risk in the marketplace today, with a lot more volatility.”
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.
“He’s an impulsive risk-taker,” she says. “He always lays everything on the line.”
For risk-takers who want to get rich and stay rich, Ms. Hausner advises taking a step back every so often and evaluating important decisions rather than leaving them to impulse.
“Some of these people roll the dice and they get rich,” she says. “But they have to realize that if they roll it again, the result may not come out as well. They need to stop themselves before they roll again, and deliberate.”