Let's learn something about investing from the rich
A new study from the Pew Research Center has everyone talking. Unfortunately, I think it's got us talking about the wrong thing.
The study showed that the nation's wealthiest households boosted their net worth by 21.2% from 2009 to 2011, while the rest of us saw our net worth decline by 4.9%.
Pew attributed that disparity to the big rebound in stock and bond prices that began shortly after the Great Recession ended in June 2009.
The great majority of those gains flowed to the most affluent households.
That resulted in a lot of very predictable news stories about how "the report underscores the nation's growing income inequality," as Bloomberg put it.
OK, but I think we can get more out of it than that.
The rich have been getting richer for more than 30 years now. Dozens of studies have documented this disturbing trend. It's real, and it has serious implications for the future of our economy.
What I find interesting about the Pew report is that is shows one of the major reasons why wealth is becoming more concentrated.
Affluent families have a lot more experience coping with market ups and downs.
That made them much more likely to take a deep breath and stick with their stocks and bonds through the worst of the recession, confident that the markets would eventually recover.
Way too many middle-class savers, who had just begun investing through retirement plans or online brokerage accounts, panicked and bailed.
About $445 billion fled domestic stock mutual funds — the primary way most of us invest in the markets, especially through 401(k)s and IRAs — from 2007 through 2012
I know many hard-working families had no choice but to tap their savings, including retirement accounts, when they were hit with layoffs and had no other way to pay their bills.
But whatever the reason, the result was the same. Those investors bought high and sold low, locking in their losses as the markets bottomed out.
So what should we really learn from the Pew study?
That the rich profited from generations of investing experience during the last financial crisis.
And let's just go ahead and admit it — that experience made them smarter money managers than we were.
If we want to build real financial security we need to put at risk at least some of our hard-earned money in stocks — and be ready to ride out the market's exceptional volatility.
Every middle-class saver is wiser now.
Let's just vow not to make the same mistake the next time the economy hits a downdraft.
And believe me, there will be plenty of opportunities to put that hard-earned knowledge to use.
One final reassuring thought about the Pew study.
You probably couldn't have picked a two-year period in which the wealth gap would have been more dramatic.
It covers a time when the stock and bond markets were recovering nicely — thanks to a big push from the Fed — but the housing market was still in the tank because government foreclosure-prevention efforts were dismal failures.
Property values didn't bottom out and start recovering until 2012.
But the housing market is going gangbusters now, at least it appears to be from the latest S&P/Case-Shiller index released this week.
Home prices in the 20 big cities the index tracked gained 9.3% over the past year ending in February. That's the biggest annual increase since May 2006, which is back when the real estate bubble was still inflating.
I suspect the next time someone does a study like this, covering 2009 through 2014, for example, middle-income families will enjoy a nice bounce in net worth driven by the growing equity in their homes.