Why the Rich Get Richer—and How You Can Too

By Jim Woods

Why the Rich Get Richer—and How You Can Too

A few years ago, building wealth in America was all about getting a good education, a good job, diligently saving money through your 401(k), and investing in real estate. That formula worked through the 1990s, and through most of the 2000s.

Then the housing market crashed, the banking and financial system nearly imploded, and the value of stock portfolios, including most retirement accounts, got slapped upside the head by a vicious bear. A foreclosed house with a red foreclosure stamp running along the top of the picture.

If you’re like most investors, you probably were counting on a consistent rise in your stock holdings to get you to the next level of wealth—and maybe into the echelons of the so-called rich. A big part of that plan also was likely the increased value of your home and/or other real estate holdings. Well, we all know what happened to real estate prices when the bubble burst, and that put many investors in a seemingly inescapable hole.

We also know that many investors threw their hands up in frustration and sold their equity holdings at the very bottom of the market in late-2008 and early 2009. To make matters worse, many have still stayed out of stocks since 2009, thereby missing out on one of the biggest bull markets in history.

Yet the meltdown in both the real estate and equity markets in 2007-2008, along with the pessimism about the future of the economy and the markets, were reflected in a 2012 poll commissioned by the Washington publication The Hill that revealed that nearly half, or 47%, of likely voters surveyed now believe it is impossible for them to become wealthy in the course of their lifetime.

Even more disturbing to an advocate of smart investing like me is the survey’s finding that fewer than two-in-five likely voters that year, or 37%, think they can ever become rich.

These findings certainly highlight the lack of confidence many Americans feel about their economic future, but the way I see it, you don’t have to buy into the pessimism.

rising stock market chart with piggy bank on jim woods way of the renaissance man

Getting rich and achieving success is possible, but in order to get rich and stay rich, you need to emulate the investing behavior of the rich.

And what do the rich do to get and stay rich? The answer is actually quite simple—they invest in stocks.

According to a June 2012 article at CNBC.com, “Why the Rich Recovered and the Rest Didn’t,” the reason why the wealthy have managed to recover from the ravages of the worst economic downturn since the Great Depression is because they have a greater proportion of their wealth in stocks, and less of their overall net worth in their homes.

The article points out that according to the latest data from the Federal Reserve, the wealth of the middle class declined by more than a third between 2007 and 2010, but the wealth of the top 10% actually grew by 2%.

Yes, this is a case of the rich getting richer, but how did they get that way?

According to Fed data from 2009, the top 1% of income earners had just 10% of their overall wealth attributed to real estate. This group had much more of its wealth, or 38%, in financial investments, including 9% of their wealth in stocks.

By comparison, the Fed data showed that both middle class and upper-middle class, i.e., those in the 50% to 90% range, counted more than half of their wealth in their homes. This group only had one third of their wealth in financial investments, and perhaps most revealing, they only had 1.6% of their wealth in stocks.

The initial conclusion you may draw here is that the reason why the rich have more money to invest in stocks is simply because they have more money. Yet looking at things through this simplified lens obscures the deeper image to be gleaned from the data.

The real insight here is that if you want to be rich, and if you want to stay rich, you simply must invest in stocks.Luxury pool at a tourist resort on way of the renaissance man

Now, there are many ways to invest in stocks, and there are myriad services and people out there to help you do just that. Yet even before you start investing with the help of any person or advisory service, the first step is realizing that to get rich, stay rich, or get even richer, you need to invest in stocks.

No other asset class can give you the kind of upside appreciation, liquidity and flexibility that stocks offer—and no other asset class can help you get where you want to be.

So, let me repeat: if you want to be rich, do as the rich do—and get invested in stocks.

In the name of the best within us,

Jim Woods

 

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