Middle-aged Americans who experience a major economic blow – called a “wealth shock” – have a 50 percent greater risk of dying early than those who don’t, according to a new study published in the Journal of the American Medical Association. The findings suggest a wealth shock is as dangerous as a new diagnosis of heart disease, says Dr. Alan Garber of Harvard University.
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About 1 in 4 people in the study have had a wealth shock, averaging a loss of about $100,000. Often it was a result of a drop in the value of retirement investments or a home foreclosure.
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There are two major reasons most Americans are likely to experience a dangerous wealth shock, Pamela says.
- Most people have the bulk of their money in investments like the stock market and real estate that can rise or plunge at the drop of a hat. “This is called ‘paper wealth,’ meaning any rise in value is only an unrealized or paper gain,” she says. “It may vanish just when you really need the money.”
- Most people have little or no safe and liquid cash reserves to tide them over when an emergency strikes, according to the Federal Reserve Survey of Consumer Finances.
How can you protect yourself from a financial shock that can cause you to die before your time? The answer, Pamela says, is twofold:
- Avoid the conventional financial advice to have most of your nest-egg in volatile, unpredictable investments. “A strong financial foundation must rest on a bed of safe and liquid cash reserves for stability, accessible resources, and restful nights,” Pamela says. “Invest only after you have a stable financial base to support you.
- Build a safe and liquid rainy-day fund equal to at least two years of household income. “That gives you the peace of mind of knowing you can weather the challenges that life inevitably throws at you.”
About the Author: Pamela Yellen is founder of Bank On Yourself, a financial investigator and the author of two New York Times best-selling books, including her latest, “The Bank On Yourself Revolution: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future.” Pamela investigated more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other investments, which led her to a time-tested, predictable method of growing wealth now used by more than 500,000 Americans.