Why You Don’t Feel Wealthy With Stocks At Record Highs

money-envyWhen the stock markets were imploding, so was my 401k by a magnitude of about -30%. My net worth probably took an equal percentage hit because of my holdings in real estate. Good thing it’s hard to mark to market real estate values given the lack of transactions. To make myself feel better, I often joked I was catching up to the likes of Bill Gates, Warren Buffet, and Carlos Slim given they lost billions.

Traffic in San Francisco was lighter back then. I could get a reservation on a whim at my favorite steak house and I no longer had to hear every Dick, Nancy, Lisa, and Raj tell me how much money they were making in the markets. 2008-2010 was a time for reflection. There was a reprieve from cacophony that felt wonderful.

Now that we’ve recovered and then some, I’m afraid the noise will return again.

YOU DON’T WANT A BULL MARKET

Wealth inequality is a growing issue in America and many countries around the world. Those who own equities and real assets are getting rich while those who can’t get their money working for them are falling further behind.

The reason why you don’t feel wealthy with stocks at record highs is because the majority of the population owns the minority of equities. Although this chart is from 2007, the present day percentages are about the same. Wealth is only going to get more concentrated within the top 10%.

distribution-of-us-stock-market-wealth-2007

Source: Inequality.org

The 10% own an incredible 80%+ of all the stock market wealth. As you’ve seen from a previous post on top income earners, the income split to decide the top 10% is around $115,000 a year. The top 20% (~$85,000 and up) own 90% of all stock market wealth.

If you’re making less than $85,000 a year as a household, there’s just not that much left after food, clothing, shelter, and tuition to dump into the stock markets and hope you’ll make a return. Compounding things further, there are many $85K+ income earners who don’t even bother to invest their money. The real level of dismay may therefore be much greater than 80%.

It helps to talk in extremes to make a point. Imagine if stock markets went to zero and the government confiscated all our property. The rich would be just like everybody else, making us all equal again. Now imagine if the Dow rocketed to 100,000. We’d all turn into slaves.

ENVY CANNOT BE CONTROLLED

It’s one thing to lose money when everybody else is losing money. It’s another thing to gain a little more financial security while others start making boatloads of money. If someone you know has a million dollar stock portfolio and returned $160,000 a year in 2012, you’ll be hard pressed not to feel envy when your $100,000 portfolio only returned $16,000. The percentages are the same, but the absolute return of $160,000 is enough to support a family for well over a year. Meanwhile, your $16,000 can’t even buy you a new Honda Civic.

Money envy leads to bubbles. Nobody wants to fall behind in an upswing, which is why you are now seeing a herd of buyers come out of the woodwork in search for real estate. Why such folks didn’t pick up properties for the cheap in 2009, 2010, 2011, I have no idea. I’ve been roaming the open houses in San Francisco for the past six months and things are not looking good for prospective buyers given the lack of inventory and lots of competition.

The one great thing about a bull market is the positive effect stronger corporate earnings has on the labor market. For the large majority of people, working is the only way to make a living. It is an inevitability employment will improve as companies struggle to meet demand. Soon we will see bidding wars for talent again. Just make sure you don’t compare yourself to someone else who doesn’t even have to work for a living.

To the 90% majority, start getting unhappy now! The top 10% are going to make everything from tuition, to real estate, to vacations, to getting a reservation at your favorite restaurant that much more expensive and difficult.

Here’s a great video highlighting the perceived, desired, and real wealth distribution in America.

RECOMMENDATION:

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Photo: Jitsu standing all alone at the 4 Seasons pool, Hong Kong, Sam, 2012.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Interesting perspective about same percentages and different amounts. I’ve made a few hundred dollars in stocks this year so far, enough to take you out to lunch Sam! But I also look at it compared to myself in the past where I’ve lost money and that I’m actually putting a plan and strategy together. To me, it’s all about myself and family, and am I getting better and doing the best with what I have.

  2. says

    To feel wealthy, you should not compare to others, but to your own Expenses! i think i even read it on financial samurai. Wealth is a relative measure. wealth is, when you have enough money to not bother how you can make a living!

    so dont feel bad getting only 16k instead of 160k, if you only need 12k to live its still 4k more than you need to be free!

  3. says

    Wealthier ? Hmm, I think I feel better than when I see the market go the other way (down)! It doesn’t change a thing for me. I felt more relief when Brown’s sales tax increase went through to save teachers. No more layoffs, budget cuts and furlough days. Accumulating more wealth does not make me spend more. Maybe, I maybe the only one though!

  4. says

    The only thing that upsets me about the market is that its ups and downs rarely have anything to do with actual fundamentals but instead are oriented on what the government is doing from one day to the next.

    But perhaps that’s just my perception of things… I’ll continue to watch my 401(k) do its thing, but my current fascination is P2P lending.

  5. CDP45 says

    Well effectively the Dow is at 100,000 comparing to past time periods. The dow between 1945-today is up 140x, where Dow today at 14,000 to 100,000 is only 7.14x. And things be much better today. Sorry you’re believing all that statist liberal crap about inequality. I am in Ecuador right now and the poor in the USA are doing 100x better than the guy who stands outside the hotel looking at my car all night for $3, or the woman who cleans the trash can that I put my soiled toilet paper in because the sewer system doesn’t allow for it.

  6. says

    So I’ve got a somewhat strange theory. I think it’s way better to start your career in a bear market, like a 10 year long bear market. That way, you buy a ton of rather cheap index funds, then when you want to start living off of your assets, you might have a bull market which will make you rich.

    So because I’m a long term investor who would like to live off my the return from my assets in about 10 years, I’m actually a little bummed that the market is roaring so soon (2 years) into my investing experience.

    • says

      That is a decent theory, but unfortunately there have been plenty of studies showing that one’s lifetime earnings ends up much lower than getting a job in a bull market. Makes sense as raises and promotions are less frequent when times are tough.

      Our incomes outweigh our investment returns by a great deal.

    • says

      I agree with Sam. You want the bull markets so your salary will increase. It sucks to see 0% raise during the bear market, but you can’t even complain because you still have a job.
      What you want is the wild swings like we’ve had over the last 15 years. Just keep buying during the dips and you’ll be fine.

      • says

        well alright, that’s a great answer to my question. I guess I’ll just enjoy this bull market we seem to be having then!

  7. says

    I’m feeling flush with money! We even went out to an expensive French restaurant last month. Actually, I’m feeling really nervous with the stock market going so high. I just sold 20% of my IRA and I’m moving to bonds. I’ll probably rebalance more if the market keeps going up.

      • Matt says

        Agreed. I am definitely over-weight in stocks given my retirement time horizon, but I’m not touching bonds until interest rates at least account for historic levels of inflation. Right now, a Fed move to 5% interest would truly be killer to bond prices. I do own Fidelity new markets Income, with international bonds that have paid relatively well. They will still eventually take some kind of a hit, but there will not be alternatives in 4 years that are 3x to 5x of the current coupon rate.

  8. says

    I’m fortunately making more money after getting a raise, but it hasn’t made me want to spend more money. I’m happy increasing my savings per month instead. I rebalanced a chunk of my 401k out of stocks and into stable fixed income to lock in some gains. The visuals in that video are pretty wild.

    • says

      Congrats on the raise! I’m hearing more and more positive anecdotes of folks finding jobs (or at least getting interviews) and deserving folks getting raises.

      You can’t lose if you lock in a gain. Hope the markets stay steady.

  9. says

    Arrrgh! Sam! I hate what you are saying…mainly because it is so darn true. I especially love the part about money envy. That really does drive the market to places that it probably shouldn’t go in the first place. For those who really know the game, they make even more money during these times. Then they get out before the crash.

  10. says

    I’ve been doing the exact same thing with my money for the last 2.5 years. Saving tons of it and investing those savings.

    As for inequality, I think one of the biggest problems is that wealth creation isn’t emphasized while wealth destruction is. People are encouraged to destroy wealth by buying crap. And even retirement savings are built up only to be drawn down to zero rather than built up to provide permanent income forever.

  11. Winston says

    Great post, Sam. I was wondering if you had seen that “Wealth Inequality in America” video. It’s been floating around facebook for the last week or so. Pretty eye-opening. I’m convinced that many of us in the income groups that are below where we “should be” in terms of wealth would be a lot better off if we had more spending discipline. I’ve just come into that mentality in the past few years (FYI, I’m about your same age), and reading your website has really galvanized that mindset for me. Sometimes I wonder if I would still have to work had I had your same discipline of saving right out of school. Instead, it was spend, spend, spend. Cars were my vice, too, but I also spent on all manner of other things. Were it not for a freak stroke of good fortune (my wife and I bought an antique coffee table at a shop for $150 and it ended up selling at auction for $150,000 six years later), I would probably still be struggling to get out of debt. Imagine if we hadn’t had to use most of that money to pay off credit cards!

    But, I digress. I am also wary of this raging bull market. It just seems like it’s running up too quickly and we’re due for another correction. For an economy that’s still “in recovery,” it seems insane that the Dow just hit an all-time high. I’m a big fan of slow, steady, *sustainable* growth and that description isn’t characterizing the stock market right now.

    • says

      Thx Winston. Is the video not the same video I have at the bottom of my post, or is it different?

      That is crazy you got a 1,000 bagger on an antique coffee table! I’ve never heard of that. Where did you find it? And why did someone sell you something so valuable, so cheap?

      • says

        Sorry, I wasn’t clear. Yes, it’s the same video. I was just wondering if you had seen it, so when I saw your post I knew that you had!

        Re: the coffee table — the artist who designed it, Carlo Mollino, isn’t exactly a household name. Just like the antique store, we had no idea what we had. We used it as anyone would use a coffee table, and when it didn’t fit in our living room after a move, it was relegated to the garage. It wasn’t until we picked up a copy of Dwell magazine that contained an article about him did we realize the similarity between his other pieces and our table. A few mouse clicks later and we knew that we had something special. I put the link to the auction page in the “website” blank, if you care to see it. It’s a beautiful piece. The buyer actually paid $180k because of the 20% buyer’s premium. I’m glad we got to enjoy it for several years before we found out its value — I couldn’t bring myself to actually use something that valuable and fragile if I knew about it!

  12. says

    Good post Sam! Like others have said I think wealth is to a certain extent relative. I know it’s easy to give into that temptation to compare, but it really gets you nowhere. The latest run up has been good to our portfolio and we have enjoyed some decent gains. We’ve taken some of those (as they’re in IRA’s) and basically just stayed the course while taking a few opportunities to get some value for the long run.

  13. gold666 says

    Excellent post. I’ve given the dynamic you describe here some thought as well, and illustrating it with the ‘extreme’ examples (at dow 100K we are all slaves!) is a great way of driving the point home.

    Even the disciplined 401k savers are hurt by the bull market, because our current contributions now buy so little–except for the ones near the end of their wage servitude, who have already built up such a massive nut that their new contributions aren’t significant.

  14. says

    I do feel wealthier in the current market. I was able to buy property in the down turn and have loyally been feeding money into the markets during the recession so its nice to finally see these investments providing some nice returns, even if they don’t stack up to what others are making.

    The job stability that a good market brings helps with this feeling too. Many more options are opened up for your money when you don’t have to worry about getting axed on any given day.

    • says

      Nice job getting property during the downturn. It really is about employment for most of us given that’s how most of us make a living.

      But for those online, a great economy can also mean more ad spending too. Positive wealth effect.

  15. says

    So wealth distribution looks like the compounding returns of the stock market… Put a little, get a little, put a lot.. get.. holy crap! Compounding has been the friend of the 1% for sure! Actually the 1%.. are most of their funds in the stock market, properties or businesses?

  16. says

    Ahahaha. Your post is so timely.

    I just sold a stock which doubled in price. I had 15,000 shares and made $6,000 in profit. Made me quite happy, until my boss told me he sold the same stocks, but he had 1 million shares. Suddenly $6,000 felt like pocket change.

    It also means that even though my boss and I buy the same stocks, he makes a lot more than I do, because he can afford to buy shares in big volumes, and make money of marginal trades. I can’t do the same, because commission and fees would eat up most of profit if I do the same.

    The rich gets richer indeed.

  17. says

    I couldn’t agree more. Unfortunately our society places more value on instant gratification and “doodads” than real assets. I understand completely that a family might make considerably less than a CEO, but that does not mean the family can’t live below their means, get creative, and invest. It might not make an immediate difference, but they can pass that wealth to their children.

  18. Investor Junkie says

    Sam,

    You know this: The time you really make money in stocks or real estate is when you buy, not when you sell. The more others are getting greedy the more I’m becoming fearful.

    “What are you doing with your Benamins now that the good times are back?”

    Paying off some debts, looking at some home improvements, and more importantly looking to minimize taxes more than anything else.

  19. says

    I’ve been a little nervous about the market as well. Right now our wealth is tied up in my wife’s 401(k) that won’t be touched for about 28 more years. Since I don’t want to time the market and because it’s such a long ways away, we’re going to keep with the program we have and finish paying down the debt.
    It’s also a little disheartening to see the real estate market go up because we didn’t have the money to buy when it was down. But I refuse to buy an income property that is overpriced. That just doesn’t make good sense.

  20. Zach says

    I definitely feel wealthier, but also increasingly frustrated trying to get my money working for me.

    As a result of a recent windfall I have about 60% of my net worth in cash. It seems like a bad idea to dump it into stocks with the DOW pushing record highs every day. So, I’m looking at buying a house, but I’m struggling bringing myself to bid at or above asking prices that are already 10%+ higher than 6 months ago in an already highly priced region (SoCal). Any advice? That vacation home in Vail sounds like a good idea actually.

    • says

      Cash is not a bad thing mate. Buying your own house to live in is a much better idea.

      Your anecdote about asking prices 10% higher than 6 months ago and folks piling on is exactly what I’m talking about.

      You might feel wealthier, but not wealthy, not once you start looking to buy real assets! Good luck!

  21. says

    I am only 28, so I was really enjoying things when the market was depressed. I bought a lot of stocks at super-low prices and I would have loved to continue that for a few more years. This new all-time high has me nervous that I am now buying high and will be losing money in the very near future.

  22. Kaelie says

    Can someone explain how we would be slaves if the Dow went to 100,000? I guess I’m just not getting it.

    • CDP45 says

      Read my post above, but basically the Dow would need to increase by 7x to reach that value which in the past it has increased by that amount, and were not clinking chains today or yelling my name is kunta kinte…

      Don’t worry, Sam is just being dramatic.

  23. Alex says

    Hey Sam,
    good article, keep up the good work.
    Can you write about car leasing though?
    Compared to buying, is leasing a smarter option for guys like me who are obsessed with cars?
    I abide your 1/10th buying rule but i am not entirely comfortable with the idea of spending huge sum of money on the New gorgeous yet untested range rover.
    but on the other hand leasing it will cost roughly 800 a month for three years, which i think it is great as i probably will not drive the same car for three years without getting bored.
    granted it is just a thing getting you from A to B, but i am not trying to spend irrationally.cars are really something i love.

    Hope to get an answer from you.

    Regards

  24. John. C says

    the only problem I have with the 1% is the political favors they gain with their money to where they can get bailed out or have privy information after the economy and other things essential to investing where the rest of us don’t.

    In other words don’t believe the markets are fair, or the regulation by our politicians is fair with the end result being totally unfair for the retail investor. Throw in the Federal Reserve printing money out of thin air and these rich leaches getting first crack at this paper close to 0% interest, their you have it. Its not hard to make millions per month if you have easy access to debt base money, inside information, and a friendly government to your needs.

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