Thank you. This article is ridiculous. I sold my startup last year and I'm (barely) in one of those groups that he discusses. I know I'm "rich" (upper 98-99%) and extremely grateful for it.
I still work, but I now have the luxury of not worrying about the price on the dinner menu or thinking twice about getting a new laptop. I don't desire boats or fancy cars (which I would have to look at the price tag). So my real source of wealth is not my Fidelity account balance, but because I like being at home watching movies with my wife and I prefer electronics and gadgets that I'll always be able to afford.
This article is crazy, especially in this economy with the wealth gap between the rich and everyone else widening in the last few decades. A lot of people work until they die. $2M is unimaginable to them. It's a sick world we live in where $50M is scoffed at and $2M is considered "middle class".
That is an interesting notion but I don't agree with it.
You can not look at the price for stuff for a long time without having that much money as long as you stay away from cars, houses, etc.
On the other hand even if you have $100 million (which would make you rich in most peoples books) you can waste that in a couple of years buying homes and planes.
If you actually have so much money you can buy planes and houses without worrying about it for the rest of your live then you would be among the top of the fortune 100 list.
You can get rid of any amount of money by wasting it.
But if you live a normal life with normal desires then a couple of million will go a long long way towards realizing your every wish, except for the absurd.
Your own plane = extravagance, multiple houses ditto.
Great snakes! That's because $100 million is really a 'tweener number: You can be Richie Rich among your upper-middle-class friends or a hanger-on in the superrich crowd.
It takes tens of millions to be an upper-middle-class person? That would be news to most of us, and to the IRS, I bet.
It appears that this whole article is skewed by the editorialist's particular place in the very rich of society. I think that everything else he writes should be examined carefully.
I think He means that to an upper middle class person, someone who is worth $100 million (say with 5-10% of that liquid) would be superrich. This might be someone who was a startup founder whose company was acquired for a large cash + stock deal. If he hangs out with Bill Gates, his money wouldn't be as impressive.
Yeah, I think he meant that $100 million makes you richie rich among the HNWI set, just "one of the guys" in the UHNWI set, and downright poor in the billionaire set.
I'm pretty sure being worth $100 million makes you a serious "What-are-you-doing-here?"/"superrich" among upper middle class (folks making < $250k/yr).
Well, I think it would be useful to make a distinction. There are a few kinds of wealthy. Moderate wealth requires maintaining and wisdom. However, there comes a point where you have so much money you could spend like a fool for the rest of your life and never run out of money. I could see $100 million teetering around that point.
Someone just has a very different relationship with "worry". As someone who's net worth is currently a tiny fraction $2mil, I will observe that the only times I have ever worried about my finances were when my net worth was negative AND I was unemployed.
Keep in mind that Forbes (and this author) live in a world where people make money almost exclusively via cash investments. Given THAT world-view, the article makes more sense, and $2M is indeed a dividing line between classes.
The beginning shot at "Ben Bernanke dollars" really turned me off, as inflation is at a historical nadir now (to the detriment of the country). Interesting article, though, if you can look past Forbes' political Tourette's.
5% is pretty conservative, especially if you're in it for the long haul. If you look at any 30 year average pretty much since 1920, it tends to be 9% or more:
Please, please do not use 9% as your expected investment return. The numbers touted over the past decade & a half are mostly an artifact of the post WWII period.
Furthermore, consider the demographic issue of boomers retiring. These boomers are forced sellers, in other words returns will be muted for the foreseeable future because of the larger class of people who will sell equities in order to fund their retirements.
The equity risk premium is closer to 4% over cash, which in today's markets means your expected returns should be between 4.25% & 5%.
If you include tricks that most working class doesn't have the ability to pull off effectively, I believe that the returns will likely continue at that rate, and so does my financial advisor. Stuff like tax harvesting, margin borrowing, offsetting dividends with margin interest, carrying forward capital losses indefinitely, etc.
The simple fact that the majority of the population can't do these things means you get some premium over "regular" investments like mutual funds, CDs, and cash.
That said, it's perfectly fine for us to disagree on this, but no need to be rude (or down vote :P) since really none of us will know who wins this debate for 30 years :)
It looks as though you are taking a much more sophisticated approach to investments. In which case, you are current to have higher expectations. I was more reacting to the general belief among asset managers where they assume they can average 9% by doing little work.
We actually don't disagree, as it were. As long as you are systematic in your approach, continuously question your assumptions, & constantly look for "what ifs".
Zero effort investment return is typically a shade or two under inflation, so even if the absolute number increases your ability to buy stuff steadily decreases, as does your effective net worth.
Agree, but what is "zero effort"? My financial advisor is self-described "lazy" (he's an odd fellow, we're lucky to have him) but he does quite a bit more stuff than your regular Joe does when it comes to managing our money. That's why I believe that 9% or more is still reasonable to expect - even with inflation.
It could go down too, by 4%. Risk works both ways, hence the higher reward. You can't really expect anything, the only thing that you can do is trade risk for potential gain or loss and hope that you jump to the next ice-floe when you should.
Sure, on any given year it can swing wildly, but long term I believe that those who invest in individual stocks ("the rich") will do significantly better than inflation.
It sounds like you're assuming it's a fair game and that everyone gets to participate. The reality is most people don't get to do the things the rich get to do, and their gain tends to come at the everyone else's loss.
For example, the rich often pay a lower tax rate than the middle class due to various tax policies designed to benefit them, such as offsetting margin interest against capital gains or carrying forward capital losses indefinitely. Those gains have to be included in your overall returns and are why the rich are getting further ahead.
That all said, the best way to boost your wealth is to create it from scratch and start a company.
It sounds like you're assuming it's a fair game and that everyone gets to participate. The reality is most people don't get to do the things the rich get to do
Anybody can go to ETrade or Fidelity and buy an S&P index fund. (Or individual stocks, but that usually produces worse results).
carrying forward capital losses indefinitely
That may let "the rich" pay a low effective tax rate one year, but if so it means they paid a high effective rate in previous years where they had capital losses but couldn't use it to offset ordinary income. Getting rid of that offset would put an end to virtually all investing: investors would suffer 100% of their losses but keep only 85% or less of their gains, and that's not even accounting for inflation.
Take a look at the major US stock market indices from 2000 to present: DJSE, S&P 500, NASDAQ. They're flat or down (markedly so for the NASDAQ from its 2011 peak).
Stock investing for retirement is predicated on a market which rises relative to inflation (investing in this regard is an inflation hedge).
Paul Krugman in The Great Unravelling (2003) noted that a stock market which provides consistent returns is also consistently undervalued. Stocks (or any other investment vehicle) are not an automatic win.
> Stocks (or any other investment vehicle) are not an automatic win.
And if something would be an automatic win it wouldn't take long before everybody would be doing it, killing the economy (and whatever it was that was an automatic win) in the process.
Very interesting, all the comments this post has received. I posted this link on HN because I guessed that several readers here are entrepreneurs like myself, who would one day like to be amongst the 'rich' (or according to the articles author 'upper middle class') and would like to know how that segment of society lives. I had no intention of starting a discourse on class warfare ;)
On the other hand, personally I found this article to be extremely instructive on the relationship between 'net worth' and 'income'. As someone who has worked a job all my life, till date, I have always looked as my salary as my measure of how well I was doing financially. This article made me take an alternative perspective and look at 'net worth'. If and when I decide to stop working for money (side note - someone said Steve Jobs worked so he was middle class. He worked, yes, but I am sure it was not for money! He was Rich.) I would like to still have cash flow coming in from my investments and other passive sources. I believe that is what the author is getting to. If that amount at which I can stop working for money is $100,000 per year, I need to have $2 million in net worth; for an income of $1 million (whew!), I need to have $20 million, and so forth...
I was expecting a socio-philosophical analysis of why schools are being closed down, the government and people are becoming indebted, yet supposedly the wealth has multiplied in the recent decades etc etc.
But instead you get counting of money, like kids do when they're maybe ten: how much money everyone's daddy and mommy have.
What is wealth in America? Having more money than others.
You really have to be a member of the clueless aristocrat club to write for Forbes.
"Two million bucks is the great dividing line between middle-class comfort and worry in America right now. That $2 million is $100,000 in income, if you base it on an aftertax 5%."
Obviously everyone in the middle class is sitting on $2 million in wealth.
It took me a second to understand what he was saying: $2 million invested at a 5% return after tax means that you get ~$100,000 per year income from the investment. That should be enough to live a middle-class lifestyle without having to work.
I interpreted that to mean that you need $2M+ to not be concerned that a feasible series of negative events could wipe you out. For example, thanks to the idiotic linkage of health insurance and employment, most Americans would be financially destroyed by the combination of an expensive illness and losing their job, the former making the latter much more likely.
I always had this discussion with friends. Let's say you had Bill Gates money - it would be very very very hard for him to use up all his money even if he kept buying up things (Mind you - giving it all away is not included). Imagine how hard it would be to use up $50 billion?
It would be interesting to see Forbes 400 adjusted for local economy. For instance, Warren Buffett who spends most of his time in Omaha certainly gets more bang for his buck than the Billionaires that live in Silicon Valley.
Exactly. Billionaires are truly international citizens, shifting their wealth to the most amenable climates (often literally, e.g. Florida), so few of them will be truly invested enough in a certain locale for cost of living to matter.
And if they are, well then they own the entire town, so they definitely don't care.
Someone preserve this so that when TSHTF, Paris 1793 style, we can see what conditions led to it.
That's because $100 million is really a 'tweener number: You can be Richie Rich among your upper-middle-class friends or a hanger-on in the superrich crowd.
Ok, this is stupid on so many levels. First among them is that the difference between upper-middle-class and upper class is not, in reality, based on an income threshold. Steve Jobs was a billionaire and solidly middle-class. He worked too hard. Bill Gates is possibly lower-upper but he had to push himself into the right circles to get there.
The upper class (the real one) is a well-connected, socially closed set of parasitic people who peddle social connections and influence as a means of sustaining their insanely expensive lifestyles. They generally have the resources to accrue $1-2 million per year without really working, just by selling and exploiting their social connections, but they aren't all in the $50m+ net worth crowd. Just like us, some of them negative net worth. In their cases, it's usually a consequence of doing seriously stupid shit.
You can separate the lower class from the middle class based on education, income, and job prestige because the middle class's values are defined based on an ethic of production and these are taken as evidence of a productive life. The middle-class line corresponds to an income around $100,000 per year per adult at age 40, adjusted for cost of living and job prestige. (Yes, this means that 50th-percentile is not "middle class"; society is pyramidal.) The upper class, by contrast, defines itself based on an ethic of consumption-- materially speaking and in terms of social access (the ability to consume the attention of important people). Different things entirely.
Perhaps, the down-votes have a point.. I insulted Sam's memory by connecting an incisive picture to this link from Forbes. Perhaps, I should have just left the picture unattributed.
Sorry about that.. it was induced by strange inexplicable feelings of sadness combined with sincere revulsion.
Interesting guidelines here ( that often seem to be ignored ) :
" Off-Topic: Most stories about politics, or crime, or sports, unless they're evidence of some interesting new phenomenon. Videos of pratfalls or disasters, or cute animal pictures. If they'd cover it on TV news, it's probably off-topic. "
Once you stop looking at prices you're rich, no matter how much actual money you've got.