Rich get richer, faster


#1

[Permalink]


#2

This is one of the things I do for a living, and the study is right, but there are two issues that should be addressed first. First and foremost, most Americans in the 99% simply don't have any financial education. Our schools don't teach kids what a mutual fund is - so why would they grow up and use them in a smart way?

Another issue is risk. High-returning investments always involve risk, and estimating how much risk a client can bear is an art, not a science. Time horizon, financial position and psychology are all important.

Unfortunately, the folks who are really expert on this stuff generally don't want to spend their time on anybody with less than a million to invest. For most of us, it's hard to get good advice - and 100 other things also want our attention.


#3

This is basically exactly what the first article says, btw. smile

And can somebody explain to me what "70 per cent times greater returns" means? My brain can't parse that.


#4

It means your bank gives you 1% if you're lucky, and my fund averages 7% - not 71%.


#5

Of course the thing about risk, is the extant to which the wealthy and powerful can insulate themselves from downside risks, by say, having the government bail out AIG because rich and powerful people are the counterparties who will lose if they are unable to fulfill their contractual obligations.


#6

Not counting the wealthy people who believed Bernie Madoff's promised rate of returns and lost everything.


#7

Which brings us to the other tragic reality (and one that applies better to us lesser folks)

You have to care a lot about money to make a lot of money.

People who value doing useful things don't care as much about money as those who value money more than doing useful things.


#8

I should read the article - but i would say you would get 1.7% assuming that the baseline 1%. Assuming your 7% return is the baseline the Harvard should be getting 11.9%. If Harvard is getting 10 - we mortals should be getting 6 and your 7 elevates you above the average.


#9

You can get people for clients with $100k in assets.


#10

I'm surprised it's not in the ten fold ranges.


#11

You're right, my mistake. Actually, most middle-income people get zero percent, and when you divide by that...

Why do you think hell exists?


#12

I think studies of 401k returns show that 'on average' after costs people get just barely over inflation. 2.7% a year I think I read once, and inflation over that 20 year period had been 2.5% or something.

However that actually makes it sound better than it is because that's an average and the returns are skewed toward the top, so the median 401k holder makes about nothing, and most 401k holders actually lose a little bit over time compared to inflation.

The idea that every random person can and should be capable of investing large amounts of money over decades is just stupid. If that's your plan for how to provide for the elderly your plan is to not provide for the elderly.


#13

Eh, that's contradictory. Can't remember if the median was trivially positive or negative, or if it was somewhat more or less than half who actually lose over time.


#14

You nailed it. Thus, the attacks on Social Security.


#15

Well...yeah. That too.

I was just also hoping for something more immediately practical.


#16

I'm by no means rich and I spend almost zero time managing my finances, but in the past year, I've seen returns of about 12% by setting up regular purchases of index fund shares. After automating everything, the only time I spend that's even remotely related to investing is occasionally checking how the markets are doing. You don't have to worship Mammon to get decent returns.


#17

Does anyone have a link to the actual study rather than the rather shoddy summary? I'd be interested to see if the difference in returns is rich people taking more risk to achieve them, or even just that they invest period.

Outside of the Wall Street rich, the normal rich generally aren't doing any better than you could do with index funds. Wall Street just comes up with elaborate and opaque schemes to give them ordinary returns with a lot of cost.

See: http://www.thereformedbroker.com/2014/06/26/rolling-the-drunks/ for example.

Also, complaining about the Harvard endowment making more money than you is akin to complaining that the San Antonio Spurs as a team are better at basketball than you by yourself. They get to pay some of the best people in the world, to act as a team, to invest better. It would be rather embarrassing if millions of dollars of talent couldn't get you better returns than Joe Sclub who works full time and invests on the side.


#18

Just because something is a natural result of the current system doesn't mean it shouldn't or can't be changed.

That said, I really don't understand why large mutual funds don't get similar results. Isn't the whole point of those to be the kind of giant pooled investment which can leverage these economies of scale?


#19

Most of us don't even get 0% because we're paying off debt for the last 3/4 of our lives.


#20

I was confused by that sentence, too. But, I read it as: "If your investment pays 1%, then mine pays 1% + 1% * 70%, or 1.7%, which still is almost double. Confusing words, though.