The percentage of people with no wealth outside their home is sad. Homeownership is a great way to build worth for the average person. However, it is also important to diversify into other investments.
I recently stumbled across a fascinating chart by Deutsche Bank highlighting that more families than ever before have ZERO or NEGATIVE non-home wealth.
In other words, roughly 30% of households have no 401k, no IRA, no after-tax investment account, no private equity investments, no venture debt investments, no nothing beyond the value of their primary residence!
Check out the chart below.
The Percentage Of People With No Wealth Outside Their Home
If you have no investments outside of your primary residence, I'm not sure how you are ever going to be able to retire or reach Budget Financial Independence because Social Security alone is not enough to cover expenses after the age of 62.
I'm not even sure the average Social Security check of ~$1,200 a month is able to cover all your healthcare costs. Let's say you were “fortunate” enough to have worked 40 years and paid maximum FICA tax each year. You'd still only be getting a maximum Social Security check of ~$2,700 a month in today's dollars.
The reason why the 2008-2009 financial crisis was so severe was because the vast majority of Americans had the majority of their net worth locked up in their primary residence, and the chart above excludes the primary residence as part of one's net worth.
When the housing market crashed, so did the fortunes of the ~64% of Americans who owned their homes. Americans didn't have enough cash or defensive bonds or even commodities to protect them from selling at fire sale prices.
The people with no wealth outside their home lost big during the 2008-2009 Global Financial Crisis.
What's Going On With The Lack Of Wealth Outside Of A Home?
With so many asset classes doing well, why do a record number of Americans have no wealth outside their primary residence?
Here are some reasons I can think of as to why some people have no wealth outside their home.
1) Runaway trains.
After the economy started settling down in 2010, the typical American began thanking their lucky stars they were still solvent after the worst financial crisis in modern times. I cannot stress enough how shell shocked people were after experiencing so much wealth destruction in such a short time.
When you're catching your breath, you're not looking to aggressively invest in growth stocks and other assets. But starting in 2012, the stock market and real estate market really began to really take off. Meanwhile, the pace of appreciation for new assets like cryptocurrency rose faster than any asset class in history.
By the time Americans finally felt comfortable taking on more risk, all the investments we wanted to buy started giving us post traumatic stress because they're at the same sky high valuations before the crisis. As a result, we couldn't part with our cash. The trauma was just too recent.
Today, I think the housing market is in for a multi-year bull run as we come out the of the pandemic.
2) Spend before you lose all your money again.
After the financial crisis, a lot of people questioned the wisdom of saving and investing all those years given it was so easy to lose so much money. Distrust in the stock market grew to new heights as people decided to spend their money on things and experiences rather than invest for tomorrow.
Further, more people are spending money on their homes post pandemic. They are turning funny money stock gains into real assets.
Here's a millennial survey done by Goldman Sachs in 2015 about their thoughts on the stock market. GS should have asked millennials whether they trusted GS! I've come across many 35 and under people in my time who are cashed up and all about YOLO.
3) Don't know what to invest in.
Despite TV, podcasts, books, and personal finance blogs, there is still a huge knowledge hole for how and where to invest one's hard-earned savings. As a personal finance blogger, this makes me kind of sad because anybody who got on the “saving until it hurts” and investing train since I started this site in July 2009 would be much wealthier today. But as an online business owner who has two mouths to feed, this knowledge hole makes me extremely bullish about Financial Samurai's future!
Of course, I can see a scenario where people finally gain the confidence and knowledge to invest only to see the stock market and real estate market start declining once again.The key is to at least have index exposure to various risk asset classes based on your risk tolerance.
4) Real wages haven't kept up.
We can't assign blame for lack of saving and investing solely to fear and ignorance. Despite nominal income increasing over time, real median household income has gone nowhere since the financial crisis. As such, real wages haven't kept up, while everything has gotten more expensive in real terms. Thus, it's much harder to accumulate disposable income for investment.
5) The median age homebuyer is getting older.
The median age for a homebuyer in America is 32. But as home prices outpace wage growth and more education is required to get the same paying job, it's easy to see the median homebuyer age increase. Once you've put down a large downpayment, it's hard to have anything left over, especially if you bought in an expensive coastal city.
There's An Even Worse Scenario To Consider
Yes, it stinks if your entire net worth is made up of your primary residence. But can you imagine not only not owning any investments outside your primary residence, but also renting all these years? What a disaster! Renting is equivalent to shorting the housing market.
For some reason people find shorting the housing market more palatable than shorting the stock market. But the end result is quite similar – negative returns.
If the U.S. housing market gets as strong as the Canadian housing market, expect U.S. real estate prices to go up another 35% – 70%!
By now, there should be no debate between owning versus renting. If you know where you plan to live for the long term, it's best to stay neutral inflation by owning your primary residence. People who invest in stocks and rent realize this. However, those against homeownership just don't want to acknowledge the truth that like with stocks, the long term trend for real estate is also up and to the right.
For some reason, stock only investors trick themselves into believing they can't simultaneously invest in both asset classes for the long term. It's the weirdest thing! But this thinking just goes to prove point #3 above – there's a lot more financial education that needs spreading.
Don't be like most people with no wealth outside their home. Diversity your investments!
Invest Beyond Your Primary Residence
Instead of having all your wealth tied up in your home, look to actually invest in real estate by buying rental properties, REITs, and investing in real estate crowdfunding opportunities. You're not really long real estate until you own more than one piece of property.
Take a look at my two favorite real estate crowdfunding platforms. They are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the best way to go.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot of capital, you can build your own select fund with CrowdStreet.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Invest In Private Growth Companies
In addition, consider investing in private growth companies through a fund. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
One of the most interesting funds I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. In addition, you can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Manage Your Wealth Carefully
Sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing.
I’ve been using Empower since 2012 and have seen my net worth skyrocket during this time thanks to better money management. Don't be one of those people with no wealth outside their home. Diversify!