The Wealth-Biased Exclusivity of Modern American Investing

The inaccessibility and poor performance of traditional investment vehicles have limited the wealth-building process almost entirely to those with high levels of pre-existing wealth. This exclusivity of investing (growing wealth by investing wealth) has forced all those without pre-existing wealth to attempt to grow wealth by trading time for money (example: by working a “9 to 5” job). Herein lies the hopeless and unfair state of modern economic affairs.

Traditional investing was designed to only be profitable for people with a significant amount of funds to invest. The average financial advisor requires a minimum investment of $50,000. 63% of American’s don’t have enough savings to cover a $500 emergency. Traditional financial systems primarily focus on the small percentage of the American population who can invest enough money to actually see profits.

The average annual stock market returns are quoted as being 7%. (This 7% figure is reached by taking the nominal 10% annual returns on common stocks and including the adjustment of an annual 2% loss of value due to inflation.) However, after closer examination of the data behind this 7% figure, a very different trend emerges.

“Average returns are exceedingly rare — and for a good reason. People are obviously doing something very wrong with their investment dollars.”

Barry L Ritholtz (Bloomberg) – founder and chief investment officer of Ritholtz Wealth Management

The sad truth – according to Bloomberg and investment specialist Barry Ritholtz – is that the average investor actually realizes returns of about 3.7% (See the graph below). This new number of actual returns realized by the “Average Investor” is further diminished when the annual 2% inflation factor is included which leaves the “Average Investor” with only 1.7% returns annually.

Asset Class Returns vs. The "Average Investor"

With all the foregoing information being considered, after taxes, fees, and inflation, a minimum investment of $50,000 will achieve an average of $850 of growth each year. If an average 20-year old invested $50,000 into a managed fund and saved the annual $850 dividends for retirement, that person (upon reaching 60 years of age) who have only $34,000 of accumulated dividends. If that same person also managed to save up an additional $5,000 every year toward their retirement (from the time they were 20 years old until the time they reached 60 years old) on top of their managed fund accumulations, their total amount of retirement savings would come out to $284,000. This falls significantly short of the safe and reasonable retirement savings of $850,000 recommended by Investopedia.

Unfortunately, the vast majority of people do not have $50,000 to invest at 20 years of age and are also unable to save up an additional $5,000 every year. In fact, 63% of Americans don’t even have enough savings to cover a $500 emergency. If you invest $500 without a financial advisor and the growth is also the average realized return of 1.7%, you will see an average $8.50 of growth each year.

The obvious conclusion, based on the data presented above, is simply this: Unless individuals have access to $50,000 or more, they are excluded by mainstream investing and must resign themselves to the common “paycheck to paycheck” lifestyle which inevitably ends in poverty with no retirement and no inheritance remaining for future generations.

Written by: William Thompson


The Finance Buff, The average Investor Should Use an Investment Advisor: How To Find One –

Forbes, 63% Of Americans Don’t Have Enough Savings To Cover A $500 Emergency –

The Simple Dollar, Average Stock Market Return: Where does 7% Come From? –

Bloomberg, Average Returns, Rare Than You Think –

Barry Ritholtz, Asset Class Returns vs. “The Average Investor” –

Jonas Elmerraji (Investopedia), Retirement Planning: How Much Will I Need? –

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