Rowyn (rowyn) wrote,
Rowyn
rowyn

Rich Not Getting Richer

The Wall Street Journal has an interesting article about wealth volatility among the top 1% of income-earners.

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.</blockqoute>

I'm not expecting anyone to have a lot of sympathy for the plight of the folks making only $343,000 a year instead of half a million, but I found two things of particular interest. First, the statistics above don't follow the usual narrative of "the rich get richer while the poor get poorer" and they don't conform to perception class immobility: if a third of the top 1% fell out of that group in a two-year span, that also means that a different .33% of the population ascended to it.

Second was the high volatility of that wealth -- most people in the top 1% have most of their eggs in one basket. They are heavily invested in one asset: when that asset -- be it real estate, a single company, a single stock, whatever -- rises, their wealth skyrockets. When it falls, their wealth plummets. They're also frequently highly leveraged, which mean that if the wealth of their main asset plummets, they wind up not just "less rich" but actually bankrupt. (Some of you may recall this nearly happening to Donald Trump in the 90s.)

The author of the article describes this volatility as something to avoid -- it's the typical investment mantra of "diversify, diversify, diversify". If you've got one big asset, sell a lot of it and invest in a variety of other stuff instead.

But the mantra of "diversify, diversify, diversify" is about protecting your existing wealth and increasing it slowly and cautiously. If you were the sort to diversify and be cautious, would you get into the top 1% in the first place? Would you even want to? I mean, obviously if I gave you a choice between $10,000,000 and $100,000,000, you'd take $100,000,000. But if I gave you a choice between a 99% chance of $10,000,000 or a 20% chance of $100,000,000, how many of you would rather go for the $100,000,000? Those are GREAT odds, and if I could play them all day I'd certainly try for the $100,000,000. But if I'm only getting to play once -- $10,000,000 is PLENTY. Another $90,000,000 is overkill. I'm not giving up a shot at $10,000,000 to get it.

My point is -- how much of getting into the top 1% is really just a matter of caring enough about getting richer that you're willing to take huge risks in the hopes of getting there? And if you took huge risks to get there, is it reasonable to expect you to stop taking risks? Are you there because you wanted to reach $X and once you get there, you're done, or are you there because you're addicted to playing the game and you're going to keep taking those risks no matter what?
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