Making money is hard; keeping it is harder.

For the wealthiest people in the United States, the behaviour needed to create wealth is not the same as the behaviour needed to keep it.

You make money by taking risk. You keep your money by reducing risk.

It appears, from the evidence, that wealthy billionaires in America find it hard to keep their wealth once they have made it.

Take the Forbes 400 list. This is a list of the wealthiest Americans published every year who have personal wealth of over US$2.1 billion.

Financial writer Jason Zweig worked out what individuals had to do to stay on the list[1] and it was not earth-shattering.

According to Jason,

“Over the 20 years from 1982 to 2002 only 16% of the individuals and families on the Forbes 400 list remained on the list.

To stay on the list, they only had to earn 4.5% per annum average return.

Bank term deposits earned more than that and the US share market earned 13% per annum over that period.”

Hard to get on the list; but harder to stay on the list. 84% of those on the list in 1982 fell off the list over the following 20 years. They could not even make as much as bank term deposits.

Why was it so hard for the wealthy individuals in 1982 to keep their place on the list? The amount required to be on the list has not changed since 1982. It is still $2.1 billion.

It has something to do with the risk-taking mindset that got those individuals onto the list in the first place.

In my experience, the behaviour that you need to create wealth is not the same as the behaviour needed to keep it.

At some stage in the building of wealth one must reflect and think, “This is enough. It is time to protect my wealth rather than keep doubling down on risk.”

The best way to reduce risk is to diversify. If you are not diversified, then you risk losing money from one of your choices going against you.

You make money by taking risk. You keep it by diversifying.

Keep asking great questions ...

[1] Jason made these comments in a revised edition of Ben Graham’s book, The Intelligent Investor.