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This article was first published in the April 2016 UK edition of Accounting and Business magazine.

In the 1980s film Brewster’s Millions, the heir to a large fortune is given the challenge of wasting US$30m in 30 days in order to inherit a much larger sum. The comic escapades that follow make clear just how hard it can be to dispose of vast wealth.

But some of the world’s wealthiest citizens have made Brewster’s task look easier than the film suggests. A survey by Wealth-X found that 11% of ultra-wealthy Americans – defined as those with more than US$30m – had lost as much as half their wealth in the 12 months to June 2015. As a whole, this group lost a total of US$760bn over the period, equivalent to the gross domestic product of Switzerland. According to Knight Franks’ Wealth Report published last month, only 34 out of 91 countries saw a rise in the number of high net worth individuals in 2015.

Financial advisers and academics believe there is a handful of common mistakes that underlie many tales. In other words, the blunders of the ultra-rich may offer a useful guide on money management for ordinary investors. 

The concentration paradox

Perhaps the biggest destroyer of wealth is overconcentration in a single company – ironically enough, how most of the ultra-rich become so wealthy in the first place. ‘Founding a company can be the best way to make a fortune,’ says Robert Whitelaw, a professor of finance at New York University. ‘It is also the best way of losing money fast.’ 

The value of shares in a single company can decline far faster than for the market as a whole, punishing those with a highly concentrated position. By way of example, the chief executive of mining firm Glencore Ivan Glasenberg managed to lose US$500m in a single day when the company’s stock tumbled over worries about the outlook for commodities. From a peak fortune of over US$7bn in July 2014, Glasenberg lost about three-quarters of it in the year to September 2015, according to a calculation by Bloomberg. 

‘Sometimes single-company stocks bounce back and other times they don’t,’ says Whitelaw. The Brazilian entrepreneur Eike Batista was the seventh richest man in the world in 2012, with a fortune of around US$30bn. In the space of less than two years, his entire net worth evaporated after his energy exploration company failed to find oil. 

Single-company stocks carry a range of idiosyncratic risks that you don’t get from the market as a whole. German car maker Volkswagen swiftly lost a third of its stock market value after it was found to have been evading US emissions rules, while BP has yet to fully recover from its 2010 Deepwater Horizon oil spill. ‘Investing in the market as a whole gives a superior rate of return adjusted for risk and volatility,’ says Whitelaw. 

No place like home

Investors, even ultra-rich ones, tend to put their money into their domestic market. For example, Swiss equity investors hold about 75% of their portfolios in companies based in the small European republic. That can be a mistake. 

One cautionary tale of geographical concentration for 2015 comes from China. Wang Jing, the Chinese technology entrepreneur, whose fortune has been heavily focused in the domestic market, saw his wealth fall from US$10.2bn since June 2015 to a mere $1.1bn as a result of the sharp slide in the Chinese stock market. Investors in Russia, Brazil and the Middle East who chose to stick close to their domestic market have regretted it over the past few years. Even Swiss investors in the ultra-safe Alpine nation suffered in early 2015 after a central bank currency policy change sent the Swiss franc soaring and shares plunging. 

‘The idea that there is no place like home doesn’t really apply to investing,’ says Whitelaw. ‘A stubborn home bias can be a great way of losing money. International diversification means that even if a crisis blows up at home – as it has in Russia, for example – you don’t lose so badly.’

It has also become far less costly to have assets all over the world. Exchange-traded funds mean there is really no excuse for holding most of your wealth in just one country, says Whitelaw. ‘This is asking for trouble,’ he adds. 

Second-generation curse

It’s a wealth cliché that the first generation makes the fortune, the second spends it, and the third picks up the pieces. According to wealth consultancy the Williams Group, 70% of rich families lose their wealth by the second generation, and 90% by the third. 

Sheila Stinson, a managing director at Convergent Wealth Advisors in the US, says: ‘Excessive spending can also drain wealth with surprising speed. This can be a problem where heirs are not involved in managing the family fortune and are allowed to simply coast off their trust funds.’ Family feuds can also dissipate fortunes, with legal disputes taking an expensive toll. 

A key to preventing this, Stinson says, is to ensure that younger family members are encouraged to lead ‘purposeful’ lives and are part of financial decision-making from an early age. 

‘Multigenerational planning is something wealthy families are getting better at,’ says Robert Paul, executive director at London & Capital, a wealth adviser focused on high net worth individuals and families. ‘We tell families that the key is involvement, communication and education. In many of the families I advise, children get involved early and are given pots of money to control early in order to get their heads around the situation.’

Spread the wealth

Placing too large a share of your assets with any single wealth manager can be costly, as investors in the hedge fund run by Bernie Madoff learnt to their cost. While frauds like Madoff’s Ponzi scheme are rare, individual funds or managers can mess up, taking a big chunk of your wealth with them. The collapse in 1998 of Long-Term Capital Management, a hedge fund with several Nobel-prize winning economists on its board, was a reminder that prestige is no guarantee of success. 

Non-millionaires are unlikely to shed tears when the ultra-rich suffer major financial problems. After all, most remain fabulously rich by any normal standards even after financial errors that make Brewster look like an amateur in wealth destruction. But rather than an opportunity to gloat, what these high-profile blunders offer is an invaluable lesson for ordinary investors. 

Fernando Florez, journalist