The hardest part about getting rich? Staying rich.
When I sat down with Victor Haghani on a recent episode of the Earn & Invest podcast, he shared an old adage passed down from his father: It is harder to hold onto money than to make it.
In the personal finance community, we spend an incredible amount of energy talking about how to build our net worth. But making a fortune usually requires taking massive, asymmetric risks over a long period. Keeping that fortune requires something entirely different—disciplined risk mitigation. And because wealth decisions happen over decades, maintaining that discipline over a lifespan is incredibly challenging.
Victor knows exactly what happens when risk gets out of control. Today, he is the founder of Elm Wealth, but back in the 1990s, he was a co-founding partner of the hedge fund Long-Term Capital Management (LTCM).
For years, LTCM enjoyed spectacular success, averaging annual returns of 40%. Then came October 1998. Through leveraged positions, the fund lost 92% of its capital, ultimately requiring 14 banks to step in and inject $4 billion just to liquidate the portfolio.
Victor took that brutal experience and wrote The Missing Billionaires: A Guide to Better Financial Decisions. In our conversation for Earn & Invest, he broke down why so many of us are looking at risk the wrong way.
Here are a few concepts from the episode that completely shifted my perspective:
Victor pointed out that average annual returns can be highly misleading. Imagine you make 50% one year and lose 50% the next. Your average return is technically zero, but your actual compound loss is 25%. During LTCM’s run, the average annual return remained positive (around 20%), but an investor who left their money in the fund finished with a compound return of -100% once they lost everything.
The biggest takeaway here is diversification. Never concentrate too much of your wealth in your own business—a painful mistake also made by employees at Enron and Lehman Brothers.
Instead of striving to amass as much nominal wealth as possible, Victor argues we should focus on maximizing expected utility—the happiness and welfare we get from spending and giving money away. Wealth is subject to decreasing marginal utility. Earning an extra dollar doesn’t bring nearly as much joy as losing a dollar brings pain. Victor compares it to eating gummy bears: each additional one brings a little less incremental happiness. Because we are naturally risk-averse, the rational goal of investing is actually to maximize risk-adjusted wealth.
Victor highlighted the lifetime consumption models developed in the late 1960s by MIT economists Paul Samuelson and Robert Merton. Their work proved that an individual’s spending policy and investment policy are inexorably connected. It is highly suboptimal to maintain a fixed spending policy (like a rigid “4% rule” adjusted for inflation) while holding a highly volatile, risky investment portfolio. To avoid bankruptcy, you have to be willing to adjust your spending when your portfolio declines, basing your de-accumulation on a portfolio’s risk-adjusted, after-tax, inflation-adjusted expected real return.
Turn on the financial news, and 99% of the coverage is about what to buy—hot stocks, index funds, or crypto. Active stock picking is a highly competitive, zero-sum game where you must beat institutional giants.
Victor asserts that how much you invest (bet sizing) is far more critical. Sizing is a non-competitive, positive-sum decision tailored strictly to your own risk tolerance. You can survive getting the “what” decision wrong as long as your sizing is correct. But if you get your sizing wrong, you can be completely ruined—even if you picked the right assets.
We also talked about how DIY investors can use this exact framework for practical everyday decisions without needing complex math. It can be as simple as intuitively determining how much guaranteed return you would accept to give up a volatile equity portfolio, or opting for the highest possible deductible on health or home insurance to save on premiums while taking on a tolerable level of personal risk.
If you want to stop obsessing over what to buy and start mastering how much, check out the full episode on your favorite podcast player. Let me know what you think in the comments!
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