The Missing Billionaires: Where Have the Billionaires Gone?

A tragic notion we sometimes hear in our profession is that someone is “so rich” they don’t need any financial planning. Or, similarly, that someone “must be smart” and therefore “a good investor” because he or she is wealthy. The implication is that ultra-high-net worth individuals don’t require investment advice and, perhaps, have less need for broad diversification than those of lesser means.

While there is so much wrong with such statements that it’s hard to know where to begin, two authors, Victor Haghani and James White, tackle these myths head on in their book, The Missing Billionaires.¹ This is a new must-read for wealthy families and those who advise them—especially those who think they’re too rich or too smart and therefore don’t need financial planning and broad diversification.

Where are all the billionaires?

Haghani (of Long-Term Capital Management fame) and White argue the United States is “missing” thousands of billionaires. Consider the evidence. The U.S. Census Bureau counted over 4,000 millionaire households in the year 1900 in the United States. Had just 25% of those families invested in a broadly diversified stock portfolio (something akin to the then Dow Jones Industrials, constituted in 1896, or today’s S&P 500), there would be over 16,000 billionaires today—and that’s after adjusting for spending and taxes.

So how many billionaires are there today? Not 16,000. According to Forbes, in 2022, there were only 730 billionaire families in the United States, a “short fall” of more than 16,000. But Haghani and White note that we needn’t go back to 1900 to observe this pattern; they argue, shockingly, that less than 10% of billionaires on today’s Forbes list can trace their family roots back to any of the billionaires on the same list in 1982. The conclusion: families with vast wealth seem to lose their wealth with alarming regularity and speed.

To be clear, Haghani and White aren’t lamenting the fact that we don’t have more billionaires today. Rather, their book is an exploration of what happened, why we don’t have more, and what families can do about it.

The Vanderbilts

Consider the Vanderbilts. When Cornelius Vanderbilt died in 1877, he was the wealthiest man in the world, leaving an inheritance of $100 million ($2.8 billion in 2023 dollars) to his eldest son, Billy. However, within 70 years of Cornelius’ death, the family’s wealth had largely evaporated. Today, not a single Vanderbilt can trace their wealth to the vast fortune Cornelius bequeathed to his son in 1877. According to Haghani and White, had the Vanderbilt heirs simply invested their wealth in a diversified portfolio of U.S. stocks, spent 2% of their inheritance per year, and paid their taxes, each of today’s living Vanderbilt heirs would have a fortune of more than $5 billion.

What happened?

For all their wealth, the reality remains that wealthy families are still human. They’re still susceptible, perhaps more so, to the same logical fallacies, biases, and bad investment behaviors that harm less well-off investors. Haghani and White identify two root causes for why we don’t have more billionaires today: (1) poor risk management and (2) spending policies divorced from their asset allocations.

In English: they were poorly diversified and didn’t have a comprehensive financial plan that connected the dots between their portfolios (i.e., asset allocation policies) and their current and future spending decisions.

Poor risk management

Haghani and White, who now run a wealth management firm dedicated to serving finance professors and financial professionals, argue that wealthy families spend far too much time and attention debating which stocks to buy and sell. In sharp contrast, they spend virtually no time on the critically important topic of “position sizing”, which is an indirect reference to diversification across and within asset classes (i.e., you can’t diversify properly if you’re making outsized bets on individual companies or asset classes). To be blunt, wealthy families have historically failed to grasp that most basic lesson from Investing 101: to broadly diversify their portfolios, both across and within asset classes.

Consider this year’s “Magnificent Seven”—Apple, Microsoft, Amazon, Google, Nvidia, Tesla, and Meta. On an equal-weighted basis, the M7 returned nearly 100% YTD through July 31, 2023. To say that there’s been intense interest in these companies is a monumental understatement. Advisors and clients often ask, “Why don’t we own these M7 stocks?” (Answer: We do.) Or, “Why don’t we own more?” (Answer: Because we don’t want our clients to end up like the Vanderbilts!)

Spending policy (aka, “budgeting”)

Spending practices (current) and spending goals (future planned spending) arguably should determine a family’s asset allocation—more so than anything else, including risk tolerance. In fact, one of the key culprits identified by Haghani and White in the disappearance of intergenerational wealth is the lack of a disciplined spending policy that is proportionately connected with the family’s asset allocation policy. The two need to work together in tandem; specifically, they argue (rightly in our view) that the expected downside volatility of families’ portfolios should mirror the maximum tolerable downside volatility of families’ spending. Said differently, a portfolio with an expected downside deviation of 10% should be prepared to reduce spending by an equivalent amount should the portfolio experience declines. A portfolio return of -10% should result in a 10% reduction in spending. If not, families’ spending depletes portfolio assets thereby hindering the portfolio’s ability to recover from market losses.

In practice, most wealthy families (probably most families) continue to spend—or even increase spending to adjust for inflation—despite serious drawdowns in their portfolios. This practice of setting asset allocation policy and managing portfolios in a manner that’s disconnected from spending policy (which also includes things like education funding, charitable giving, and future estate bequests) is a ticking time bomb for families expecting their wealth to last in perpetuity (or at least for several generations).

Takeaways

Don’t be like the Vanderbilts. That’s the big takeaway. All families, regardless of wealth, would be wise to ensure their balance sheets are appropriately diversified across and within asset classes; and that their asset allocations are tightly and proportionately managed to current and future spending plans.

Poor risk management and the belief that one doesn’t need high quality financial planning are byproducts of two major biases: overconfidence bias (e.g., success in one area of life doesn’t necessarily translate to success in other areas, especially investing) and outcome bias (e.g., being wealthy doesn’t necessarily make one a “good” investor). Behavioral finance experts could probably list at least a dozen more biases, but these two are at the top of the list.

At Mercer Advisors, we aim to help keep behavioral biases in check through a combination of clear and candid advice, financial education, and family governance (to, among other things, support healthy spousal and intergenerational decision-making)—and all through the lens of uncompromising fiduciary ethos.