Accumulating Wealth in the Stock Market

Updated: September 2, 2020

The stock market has been the primary reason for the diverging wealth gap. The logical solution is to get more Americans invested in the stock market.

According to Forbes, nine out of every 10 households with incomes over $100,000 own stocks. But sadly, most American’s don’t have any personal capital invested in stocks. Only 20% of households earning less than $40,000 own stocks. And research from the National Bureau of Economic Research shows almost two-thirds of investors have less than $10,000 in the stock market.

Fifty-five percent (55%) of Americans report that they participate in the stock market (own stocks), according to Gallop.

Furthermore, Gallup finds “relatively few Americans in lower-income households invested in stocks” and only 55% of Americans reported that they own stock, based on polls conducted in March and April of 2020. This is identical to the average 55% recorded in 2019 and similar to the average of 54% Gallup has measured since 2010.

In other words, the stock market’s exponential rise over the past decade has not helped most American families. In fact, “fewer Americans are benefiting from today’s bull market than did so in bull markets before the financial crisis.

The gains in stock values in recent years seem to have done little to persuade people who may have divested themselves of stocks to get back in the market” according to Gallup’s research. In fact, a recent survey by Betterment highlights this great misfortune. When asked how the stock market performed over the past decade, roughly half of those surveyed said the market had gone nowhere. Worse yet, a further 20% said they thought it fell!

Eighty-four percent (84%) of all stocks owned by Americans belong to the wealthiest 10 percent of households, according to NYU economist Edward N. Wolff.

The number of Americans who own stocks has plunged since 2000. But after a relentless 20-year decline, this trend is reversing. Thanks to commission-free trading led by Robinhood, all the major brokerages have seen millions of new investors flood into the market in 2020.

In short, millions of new investors are getting into stocks for the first time. And it’s a wonderful thing.

You will never accumulate wealth “Renting Out Your Time”

Working hard and saving money is necessary. But it’s often not sufficient. Ramit Sethi wisely points out in I Will Teach You To Be Rich:

“Because of inflation, you’re actually losing money every day your money is sitting in a bank account.”

Additionally, Robert Kiyosaki of Rich Dad, Poor Dad likes to say that:

“The rich get richer by continually reinvesting asset profits back into assets.”

Thus, as you may see, it is extremely important to make your money work for you. But, it appears that most people don’t know how to make their money work for them. But if you want to build massive wealth, you need to put your dollars to work.

And, you can put your dollars to work by owning a piece of a successful business—owning stocks—that is the main path to accumulating wealth that’s available to anybody.

It’s okay if you only have a little money to get started. These days it’s totally free to buy stocks through most big brokerages. And you can usually open an account with as little as $100.

Start by investing in a market index fund 🙂

The important thing regarding investing is to overcome the fear and break the inertia, and start investing. No more excuses. If you’re just getting started investing, first it is recommended that you buy a market index fund such as a S&P 500 Index mutual fund or exchange traded fund that owns a list of U.S. large cap stocks. That way you’ll own tiny fraction of hundreds of businesses.

An index is a list of companies…so when you buy S&P 500 index mutual fund or exchanged traded fund, you are buying an index that tracks the S&P 500. In fact, buying fund that tracks a market index is one of the best ways for beginner investors to get their feet wet in the stock market.

The S&P 500 is a stock market index that measures the performance of about 500 companies in the U.S. It includes companies across 11 sectors to offer a picture of the health of the U.S. stock market and the broader economy. This stock market index is viewed as a measure of how well the stock market is performing overall.

Additionally, index funds continue to outperform the vast majority of the actively managed funds in their asset classes. In the 15 calendar years ended last Dec. 31, the S&P 500 Index outperformed 90.5% of all actively managed U.S. large-cap funds, according to analysts at S&P. Among 13 specific asset classes, the percent of funds that under-performed their benchmark indexes were similar, ranging from a low of 81.4% for large-cap value funds to a high of 95.2% for mid-cap blend funds.

Focus on Asset Classes

Investors are increasingly focused on asset classes instead of individual stocks. The reasons are that asset classes are much less risky than individual stocks, without sacrificing anything in terms of expected return.

The experts teach that the expected return of one stock is the same as the expected return of the entire asset class of which that stock is a member.
Yet the risk of owning just one stock is huge: It could disappear (relatively unlikely) or go into massive free-fall for any of a variety of reasons. There’s very little risk of that happening with an asset class made up of hundreds of stocks.

References:

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