How the rich get richer (2020)
imf.org
imf.org
I may be mistaken but I think investing in VTI (total stock market index) and reinvesting dividends from 2004 to 2015 would yield you close to that 140 percent. Maybe 120 to 130? No need to be a top 0.1 percent to invest in that.
The "rich are getting richer" is a natural consequence of compound interest (which works for those with assets, and against those with debts) and the stagnation of some wages.
Risk adversity is a big driver of that, since losing your emergency fund or savings is catastrophic for someone with no other assets, whereas losing some of your large stock portfolio is something rich folks shrug off.
“Conventional wisdom suggests that richer individuals put more of their assets toward high risk investments, which can result in higher returns. But our research finds that wealthy people often earn a higher return even on more conservative investments.”
I imagine similar examples exist at other firms, companies, etc.
Then there's things like inheritance, foundations, access to better financial advisors and portfolio managers, access to social networks of other wealthy people, etc.
>access to better financial advisors and portfolio managers
If anything, active wealth management usually ends up yielding less than a broad market index fund.
Almost every country in the world has some undocumented open loopholes that the rich or the system savvy can exploit to reduce their tax burden, and get a lot more back from the state (or avoid paying in the first place), and the people not knowing them can loose a lot in the long run by not knowing how to play the game in their favor.
For example, in Germany and Austria, there's an insane amount of wealth built on the tax fraud of cash-only businesses, especially for small family businesses in more rural areas where strict audits are less likely. It's not legal, it's fraud, but the people who know the game, know how to exploit it without ever getting caught, that's why flashing and discussing wealth there is socially frowned upon (because many have it obtained through inheritance of a "dark past™" or tax fraud, and it's tough to explain to everyone and the tax man how you bought a new Porsche and a villa in the south of Europe just by selling sausages on the weekend, so everyone flies under the radar by driving old cars and dressing modestly, while sitting on small empires on the side without anyone being the wiser).
The majority of wealthy people today grew up in the 1970s, which was a very different environment from today.
Almost certainly, unless the “we prefer everyone equally poor” brand of politics succeeds. The most insidious belief is that the system is some how rigged against you no matter what you do. It just isn’t true.
The system IS rigged against you, aka the working class, and in favor of the asset/capital owning class.
Moving up from the former category, to the latter, considering the wage stagnation and the interest rate and CoL increases, is very VERY difficult, so scoffing it off as if it's something trivial that anyone can do and if they don't the it must be their fault, is just laughable.
So, you see, it's difficult to know these days what's sarcasm and what's not as so many people, especially here, are completely detached from the reality of the average person and live in a bubble of their own farts.
Not sure if where you got that number, but even if 30% got their initial wealth from inheritance, that's still a substantial fraction. I've witnessed the phenomenon in person, though unfortunately it wasn't I who was receiving the money!
Even if the majority are self made, that doesn't take away from the point that there is more than one way to wealth, and that it doesn't just boil down to compound interest.
> Also financial advisors, wealth managers, portfolio managers whatever you want to call them are a scam.
They are, and they aren't. Many people, even those "smart enough" to get rich, need someone to manage their finances, and are barely capable of doing it themselves. However, they aren't better off with a housefly as their financial professional. Many financial professionals are bozos, but some do their job well, and when you not only have the wealth to acquire a competent one, but possibly a social network that can connect you to one with a reputation among other wealthy people, then you have a good chance of being better off than a non-rich person picking an off-the-shelf financial advisor.
I won't go into details, because they're country specific, but earing a wage here, especially an above-average (think engineer not richy rich) means you pay around 50% of your money in taxes. The percentage the government gets from the customer to your bank account (including the employers responsibilities and VAT) is even higher.
What you can do to optimize taxes is to drive 5, 6 hours to a different country, open a company there, and start charging the customers via that company... since the company profits are taxed a lot less, you pay only ~10% taxes. Because you want health insurance in your home country you also become an "inependent contractor" there, pay minimum taxes and get medical, kindergarden for your kids etc.
Now, if you're an engineer, with 1.5x-2x average paycheck it is possible but just not worth it... two accountants, driving there every now and then, two different taxes, fixed startup fees, fixed fees for yearly reports etc., plus the added risk of something going wrong, dealing with foreign tax inspectors etc.
If you're earing 20x the average paycheck, the fixed yearly costs are the same, but the 50%->10% tax reduction is a huge saving.
Same with companies... facebook can register a company in ireland and syphon their money over there, but for a mom and pop restaurant it just isn't worth it.
Not a massive surprise that someone who goes from 10% to 90% has something going for them that means they reach 99% more frequently than the base rate but that appears to then only by 2.1%, or twice what you would achieve by chance alone.
I must be missing something.
> Controlling for age, parental background and earnings, moving from the 10th percentile to 90th percentile of wealth distribution increases the probability of making it to the top 1 percent by 1.2 percentage points compared to an average probability of 0.89 percent.
First, the rich don't reliably get richer faster than the poor get richer. (Despite what the linked article or other texts might claim.)
Second, interest rates are mostly an abstraction. Yes, if two people are both putting money in a bank account in the same currency, the one with the higher interest rate will get richer faster.
In the real world, many investments yield a variable nominal rate of return (eg real estate, stocks, art, etc). And you also have to worry about factors like inflation or counter party risk.
yes they do, as money printing benefits those who are leveraged into assets more than other types of debt holders.
The rich (by proxy, through investing in the stock market) actually hold more debt in aggregate. And per capita, they hold WAY more debt, hence benefit from money printing even more.
Money printing is indirect wealth transfer from everyone else to the rich.
Any inflation that's anticipated at the time a debt contract is made will be priced in to the debt contract. That's (part of) why high inflation economies have high interest rates.
You can load up with debt as well: it's fairly easy to open up a margin account at eg Interactive Brokers, or (almost equivalently) to trade in options (which have margin financing sort-of built-in).
Chart M2 growth to CPI and you can clearly see what I mean.
So we agree and you say that this thing is already priced in? Good.
Yes, market participants anticipate many things, and make their contracts based on what they expect. Not on any mechanical considerations of what happened before.
After 2008 and 'too big to fail', you don't?
That's very different from normal creditors being morons.
(And yes, the people with resources often, but not always, have an easier time getting the government to give them even more resources.)
Given same rate of return, the one who puts in the most money gets richer faster, in absolute dollars.
The article says that on top of this, those with more capital get better relative returns too. You don't refute this by just saying it's not so. The increasing wealth disparity we observe would seem to support this idea.
(Mostly thanks to India and even more so China going from dirt poor to poor or middle income. But many other countries like South Korea or Singapore and previously Japan have also caught up. Poland and many, but not all, former Eastern block states have also done quite well.)
Doubling 100M in 10 years to 200M is, IMO, getting richer faster than double 25K to 50K in 10 years.
If they both got the same interest rate, then their wealth would grow at the same rate. Add in progressive taxation and the gap might narrow.
If they’re getting different rates and taxation is regressive, then those seem like better explanations.
Edit: also spending patterns.
Edit again: note that this wasn’t meant to be a complete explanation. I just wanted to point out a few reasons why compound interest is not sufficient to explain a widening wealth gap (the claim in the comment I responded to).
High income save & invest a higher % of their income - therefore inflation is good (their stocks go up).
This isn't some sort of moral or judgmental statement. It's simple math. The more your income goes up over time, the less of a % is needed to cover the basics of food/shelter/energy.
Point being, through the same exact investment vehicle and with the same exact rate, a rich person of course will built more wealth than a poor person. It's just the nature of a percentage-based growth.
(Eg where I live, there's no capital gains tax, so someone like Elon Musk could just sell their shares without any extra taxes, instead of having to borrow against them.)
Notably, the rich do not have problems with "credit score", which never seems to apply to them.
First, the banks charge you interest depending on amongst other things the risk incurred. More risk, more interest. (Look at eg junk bonds for an example.)
Second, when you borrow against your stock, you typically only get, say, 50 dollars loaned for every 100 dollars of stock. (Details vary.) If the value of your stock drops anywhere close to eg 75 dollars, typically the bank has the right to sell some or all of your stock to pay off the loan.
If your stock dropped so quickly that it's gone before the loan has been paid off, the bank might or might not come after your other assets. Whether they can do so, depends on the contract you have with them. Again, if it's a non-recourse loan, you are going to pay higher interest, and they'll demand more conservative loan to value ratios.
> If the stock goes up, you can pay off the loan and keep the difference.
Third, why would you pay off the loan, and with what money? The whole point of the scheme is to never sell stocks, so you never have to pay capital gains taxes.
You just let your loan's balance accumulate over time with the compound interest.
(One popular scheme is called 'buy-borrow-die': because of a quirk in the US tax system, you don't pay capital gains taxes when you die. So you acquire stock somehow, then borrow against it, and you pay off the loan only when you die: your estate or the bank sells enough stocks to cover the loan, and doesn't have to pay capital gains taxes.)
The banks are happy to let you run up a balance, as long as your loan-to-value ratio stays low enough. Ie as long as your stocks grow sufficiently faster than your outstanding loans.
> Notably, the rich do not have problems with "credit score", which never seems to apply to them.
Credit scores are a standardised system to deal with average people. If you are rich enough, the bank can afford to have a real human look into your specific situation, instead of relying on a number.
As as a slightly made up example: Elon Musk is known for getting into legal fights and being annoying to deal with, and trying to wiggle out of obligations. So creditors might charge him more interest purely for that risk. Whereas Michael Bloomberg always stick so this agreements, and a handshake from him is a firmer commitment than an thousand page contract with Elon Musk that covers all eventualities.
Paradoxically, someone who is known to to be able to afford expensive and competent lawyers might have to pay higher interest rates than some middle class Joe Average. It's not that the bank thinks Elon Musk has a higher risk of running out of money than Joe Average; but it's that the bank fears that Elon Musk is harder to sue than Joe Average is to foreclose on.
Owning something that earns while you sleep does tend to increase you ability to focus on what is important.
Sadly, I'm not sure anyone who is wealthy has what I would call a focus on what is important. Terrible situations, failed marriages, relationships with kids, etc..
Yet in that same year, the net worth of the top 5 wealthiest individuals in the USA (carefully watched on Bloomberg terminal and elsewhere) increased a LOT. Famously Elon Musk in particular.
How does "compound interest" explain that?
Edit: for those that doubt [0]
[0] https://www.sciencedirect.com/science/article/abs/pii/S01602...
> Regression results suggest no statistically distinguishable relationship between IQ scores and wealth
Stop spreading dangerous myths.
The rich get richer because they have access to more choices than the plebes do. There are lots of non-publicly traded investments out there. They have a minimum investment amount that many people cannot afford. A friend sets up and manages RE investment syndication deals - these are where a bunch of people pool their funds and buy RE properties (commercial offices, or large apartment complexes).
He used to require $50K as a minimum investment. He now asks $75K. He is on the low end. I've encountered many that require $100K and require you to be an "accredited investor" - you need either $1M in assets (excluding your home) or earn over $300K if married to qualify.
These investments are potentially higher risk (e.g. if they use your funds for 80% downpayment on a mortgage, and the value of the property drops 10%, you've lost half your investment). But their returns are quite high. For a deal that exits well, the investors typically get over 20% return (annualized). I used to be all about index funds, and then I saw these. You have to find an operator with a good track record, understand the factors at play well enough to evaluate their offering, and if you do your due diligence, then you pretty much always get at least 15% annualized. Most investors wouldn't even consider the investment if they felt it is less than that.
But you need a lot of money to get in.
Sounds like the bet Warren Buffett made and won.
https://www.investopedia.com/articles/investing/030916/buffe...
The trope of finding an operator with a good track record is regularly debunked by both the rich and poor.
Your link is about comparing index funds with people who manage other funds. None of these people are involved in the business operations. So yes, they suck and index funds do better. The investments I am talking about are where you invest directly in a business. You are not buying stocks in the business, the value of which depends on a fickle market (hence why I explicitly said "non-publicly traded investments"). You are buying equity of the actual business, with a contracted amount of returns (i.e. preferred investor). The operators I spoke of are the people who are actually running the business. In the case of an apartment complex, they are involved in the operations of running the complex.[1]
Don't think in terms of the stock market and index funds. Think in terms of "Hey, I'm starting a business and I'll give you 3% of equity if you give me $50K." The difference is that here they typically aren't starting a business, but buying an existing business (that already has clients, and a revenue history), so it's easy to analyze whether the business will be successful, and get a good forecast of revenue in the first 5 years.
For the record, most of my investments are in index funds so I know where you're coming from.
[1] OK, not really. Most will hand off to a property management company, but they've vetted the PMC before offering the investment to you.
REITs, whether public or private, are funds.
I am not talking about funds.
REITs usually invest in multiple vehicles to diversify. When you put in $100K in an REIT, it is spread across multiple properties. Some of it may even be used to lend money.
When you invest in the investment I speak of, you are investing in one property. There is no diversification.
When you invest in an REIT (or even in an index fund), you have no ownership of the actual investment vehicle. The REIT manager(s) do, but you don't.
When you investment in the investments I speak of, you are a part owner on paper (even if you have no say in the operations). As a result, you get all the tax benefits of owning a property. When you invest in an REIT, the tax code does not entitle you to any of those tax benefits. The REIT fund may mislead a bit in their wording, but at most they are saying that they'll pass on some of the tax benefits that they accrue to you, so you get a higher return.
There is little to no regulatory barrier to investing in an REIT, which is why their minimum investments are not that high.
The investments I speak of can allow a maximum of 35 non-accredited investors (by law). That is one big reason they carry such high minimum investments - they need enough money to buy a property and have a limited number of folks who can supply it.
In this thread I speak primarily of RE investments, because that is where I have the most knowledge. But the larger principle I speak of applies to other investments - not just RE (people investing in farms, storage businesses, car washes, hotels, etc). Again, the barrier is a rather large minimum investment and accredited status.
Again, most of my investments are in simple index funds, and I stuck to those for almost a decade because I didn't find anything better. I'm a conservative investor, and I always analyze any investment to see if there's a good chance it will exceed the S&P 500 returns in the long run. If it's not clear that it (easily) can, I do not invest. I suggest you do as I did: Join an investment group, and examine/analyze the investments they present. Learn the risks/rewards, and you'll then see that higher return (but higher risk) investments exist. They are higher risk because they are not diversified.
Due to IRS rules on how to do it, it's not profitable for ordinary folks who may own an extra house they rent out, because one has to do a formal study, which has a fixed fee. But if you own an apartment complex with 10+ units, the depreciation gains significantly overcome that fixed fee.
https://en.wikipedia.org/wiki/Capital_in_the_Twenty-First_Ce...
A great read if you haven't already.
Rich people invest in stocks. Richer people also invest in private equity etc.
The results should surprise no one.
Poor people experience the downsides of inflation (risings costs of everyday goods) without the upsides (assets they own also going up increasing their wealth).
That is - if you are barely making ends meet and spend 80% of your income on housing/food/transport/energy, then 10% inflation is a huge problem for you. If you spend 20% on the same, and have 2x your income in the stock market, inflation might be awesome for you.
It's pretty funny that they assume these original generation returns being higher are due to "exceptional talent", no one even bothers to consider the possiblity that the original wealth accuulating generation were just more mercilessly exploitive assholes...
> This suggests that while money is perfectly inheritable, exceptional talent is not.
Unless I'm missing something, it also suggests that the rich get richer because they are more talented in the first place.
Which kind of makes the point of the entire article rather moot.
It's such a disgrace. I loathe the US for this. I dislike Putin and the chinese CCP too, but the war of economic ideology is such a blatant pain, it's really frustrating how people debate about those things.
I'm dumbfounded everytime I read people trying to defend american capitalism. I quit that debate so many times, it's really bad for my mental health.
Doubtful. More likely they can simply afford to have people who ARE better with money management manage their money.
The poor, they don't have any money to manage. Stop assuming they're shit at it. If anything they have to be a damn sight more clever about it.
That second point, the monetization of non money assets due to debasement of our currency and how that creates a pressure imbalance that moves real wealth from dollar holders to asset holders, I'd say most people discussing this topic don't get. I get it, but before reading this I wouldn't have been able to articulate it so clearly. The mental model you have to have about finance and economics in order to even formulate that understanding is almost too big for one person's head.