by Michael Vandenburg, CFP®
The 11th annual World Wealth Report shows that in 2006, the U.S. population of high-net-worth individuals — those with at least $1 million in investable assets, excluding their primary residences — rose 9.4% to 2.92 million. In 2005, the same population increased 6.8% to 2.67 million. The number of ultra-high-net-worth individuals — those with at least $30 million in investable assets — increased by 11.3% to 94,970.
While this number is astounding, there are a few lessons we can learn from this group as to how they continually grow their wealth.
The rich always seem to get richer, but how? One lesson everyone learned several years ago was that the wealthiest Americans own a lot of real estate. This recent boom may have fueled a new group of millionaires, but with real estate down this past year and seemingly not going anywhere for some time, this group still went up. The first lesson we can take from this group is that diversification works. They may own a lot in real estate, but they also have a lot invested in the stock market. The stock market has been posting significant gains since it hit bottom in 2002. Not very many people were paying attention because of the real estate boom, but the stock market has been doing very well. The hard part of this is staying the course when one part of your portfolio is growing faster than others. There will always be one asset class that is outperforming all others, and the important thing to remember is to stick to your plan, and rebalance only when your portfolio needs it. This will force you to take some profits from the top performing asset class, and spread the proceeds around the rest of your portfolio.
There has been a lot of talk in the financial circles of a massive transfer of wealth happening over the next decade or so worth trillions of dollars. This transfer will be coming from the generation that worked for the wealth to the generation that inherits the wealth. While this is true to some degree, the biggest beneficiary is going to be Uncle Sam, who gets a cut from everyone. The rest is split up between brothers and sisters, spenders and savers, and will most likely keep the American consumption machine running full speed for a long time.
The real truth to wealth in America is in the numbers…less than 10% of the wealthiest Americans got their wealth through inheritance. That means 9 out of 10 wealthy Americans achieved their wealth through hard work, and diligent investing. Lesson number two from this group is to make it happen for yourself. Start now, make a plan, and then make it happen. If you are lucky enough to also inherit some wealth as well, you will most likely be more appreciative of the hard work and effort that your parents put in, and also much less likely to squander your new wealth.
While lesson number two shows that most people actually do work for their wealth, there is still a large transfer of wealth happening and the money is being transferred down to the next generation; it just doesn’t seem to stick.
So where is it all going? Just look around the mall…$300 jeans, $2500 purses, new Mercedes parked in the lot. Or take it up a notch to travel in private jets, luxury resorts, and $300,000 cars. The new wealthy group of Americans can’t even wait for their 150-foot yachts anymore. It takes up to 3 years to build a mega yacht, but if you have an extra 35 million in the bank you can order one. Then, before you have even made the final payment, you can sell it for a profit of 5 to 10 million just because someone will pay more so they don’t have to wait. The practice of yacht flipping has become as common as house flipping.
So is there actually something in here that you can learn from? Absolutely. Lesson number three, take great care of your wealth and whom you will be passing that wealth down to. Make sure you educate your family about your wealth and how it is to be utilized for future generations. Don’t let your family be one of the many that drop off the list because they don’t know how to handle wealth. This is a difficult area for a lot of families but is essential if you want your wealth to continue for generations. This is an area that I struggle with in my own family. My kids are still very young and I hopefully have plenty of time to teach them along the way. If I ever find something that seems to stick or work well with children, I will let everyone know. b