Week In Review: It's Hard To Get Rich

How Much Do You Need to be Considered Rich?

This blog is mostly about building wealth. You can qualify getting rich as part of that although many bloggers try to differentiate between the two. Merriam-Webster says the two words are synonyms. 

I have pointed out before the incomes and net worth needed to be in the top 10%, which are $145,135 and $1,182,390, respectively. But to get into the top 1% you need an income of $515,371 and a net worth of over $10 million. This is obviously much harder. The numbers vary if you are looking at households or individuals or means and medians. Clearly, you can probably make it to the top 10% for net worth over time. Just map out your net worth target by age and make a plan. It is possible on even an average income. I write a series on Secret Dividend Millionaires who are examples illustrating that it is possible.

It Was Easier to Get Rich in 1980

However, there is an argument to make that it is hard to get rich these days because almost everything is overvalued. Turn back the clock to 1980 and the U.S. just finished a punishing decade with inflation, oil embargos, gas shortages, a shift off the gold standard, end of the Vietnam War etc. But the seeds were sown for a long bull market. The 10-year U.S. Treasury was yielding over 15% and the S&P 500 was yielding over 5% in 1980. Simply buying a holding 10-year bonds provided returns that exceed annualized returns of the stock market over 10-years. At a 15% interest rate the modified Rule of 72 says that your income would double every 4.93 years. Even buying a basket of stocks yielding 5% at the time generated solid returns over time.

It Is Hard to Get Rich in 2021

On the other hand, the S&P 500 is now yielding a paltry ~1.4% and the 10-year bond is yielding 1.66%. Today, it is certainly hard or at least harder to get rich through bonds and stocks comparted to 1980. Bonds will not do it at current yields, and you have to be selective on the stocks you buy. Valuations are elevated if you have been following my weekly reviews which includes data on price-to-earnings ratios. No one really wants to buy overvalued stocks because total returns going forward will be low.

Other asset classes are arguably overvalued. Gold is trading $1842.90 per ounce, not far from the record last year. In 1980, the price of gold was about $600 per ounce but after adjusting for inflation the price of gold would be even higher than it is today. Both commercial and residential real estate are expensive. In 1980, the median home value was roughly $57,530 and at end of 2020 it was approximately $300,987. Housing price growth each year has mostly exceeded the rate of inflation since 1980 with the exception of the period around the sub-prime mortgage crises from 2009 to 2011. Alternative investments like bitcoin have gained an annualized return of 230% in a short time, but this is an extremely volatile and risky investment.

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