The Missing Billionaires: Why Great Fortunes Disappear & How to Preserve Wealth

"Any fool can make a fortune; it takes a man of brains to hold onto it." - Cornelius Vanderbilt These words proved prophetic for the Vanderbilt family. Despite being the world's richest man in 1877, their fortune vanished within 70 years. This story isn't unique - it reveals a fascinating puzzle: Where are all the old-money billionaires?

Mike G.

10/23/2024

green plant on green grass
green plant on green grass

The Math Behind the Missing Wealth

If the Vanderbilts had:

  • Invested in a diversified portfolio

  • Spent 2% of wealth annually

  • Paid their taxes

Each heir today would have: $5+ billion

🎯 Key Principles for Preserving Wealth

1. The Investment Sizing Principle

  • Focus on "how much" to invest, not just "what"

  • Use constant fractional betting (consistent % of wealth)

  • Avoid emotional decision-making

2. The Merton Share Model

Optimal Investment % = Expected Return / (Risk Aversion × Variance)

Typical portfolio split:

  • 60% stocks

  • 40% bonds

3. Dynamic Asset Allocation

Monitor and adjust based on:

  • Market conditions

  • Earnings yields

  • Risk levels

  • Personal circumstances

🧮 The Expected Utility Framework

Components:

  1. Risk Assessment

    • Personal risk tolerance

    • Market conditions

    • Time horizon

  2. Spending Rules

    • Proportional to portfolio value

    • Flexible with market conditions

    • Long-term focused

  3. Human Capital

    • Career earnings potential

    • Skills and expertise

    • Professional stability

📊 Smart Spending Strategies

The 5 Golden Rules:

  1. Spend proportionally to wealth

  2. Adjust spending with investment outcomes

  3. Consider long-term implications

  4. Account for inflation

  5. Plan for uncertainty

Warning Signs:

⚠️ Fixed spending plans often fail

⚠️ 5% annual withdrawal rate has 66% chance of failure over 30 years

✅ Solution: Dynamic spending based on portfolio performance

💡 Practical Applications

For Young Investors:

  • Focus on human capital development

  • Build career skills

  • Start early with consistent investing

  • Use tax-advantaged accounts

For Wealth Preservation:

  • Implement constant fractional betting

  • Diversify across asset classes

  • Maintain flexible spending habits

  • Regular portfolio rebalancing

🎓 Key Lessons for All Investors

  1. Risk Management

    • Diversify intelligently

    • Size investments appropriately

    • Maintain emergency reserves

  2. Spending Discipline

    • Link spending to portfolio value

    • Adjust for market conditions

    • Plan for the long term

  3. Strategic Planning

    • Consider career impact

    • Account for personal risk tolerance

    • Maintain flexibility

🌟 Final Thoughts

The disappearance of great fortunes isn't inevitable. By following sound financial principles and maintaining disciplined investment and spending habits, wealth can be preserved and grown across generations. The key is not just in making money, but in making smart decisions about how to manage and preserve it.

Based on "The Missing Billionaires" by Victor Haghani & James White