How The Wealthiest Families Make And Lose Their Money -- Part 3

In Part I of this series of articles on wealth creation and maintenance, we discussed that the wealthiest families obtain their assets from business ownership by the current generation and not via inheritance.  According to surveys of the wealthiest families, approximately 70 percent of assets come from business ownership whereas only about 5 percent derives from inheritance.  One expert who advises wealthy families cites the dividing of family assets in subsequent generations is the greatest destroyer of family wealth.  The dividing of assets can hamstring professional management, forego access to certain investment opportunities available to larger pools of money, and create a sense of entitlement – as opposed to stewardship – in subsequent generations.  In the second installment of this series, we touched upon the subject of professional management.  While mom and dad had the business acumen and financial discipline to build a business, those traits are not necessarily hereditary.  Successful families recognize this and structure their wealth to default to professional management.  Unsuccessful families don't.  We will now delve into that professional management.

Surveys of families with family-run businesses find that only about one-third retain ownership of such businesses in the second generation.  Only about 10% of families retain ownership of such businesses to the third generation.  There is likely a range of reasons for this, including an estate plan that divides the family's assets.  But, whatever the reason, a family's wealth seems to move away from that which created it: owning a business.  So, when this happens, in what direction does a family's wealth move?  The mass-market way of investing: stocks, real estate investment trusts, commodities, hedge funds, bonds, and mutual funds that invest in the same.  Given this, how might a family manage its wealth?

In the last installment of this series, we referred to research on the investment patterns of individual investors performed by Dalbar, Inc.  It found that over twenty-plus years, the average investor – who gets caught up with the emotions of the market – underperforms the disciplined and systematic investor.  This finding is based on actual data on individual investors' holdings in and trading of mutual funds.  This finding is backed up by other research, which focused on individual investors' holdings in and trading of individual stocks.