The “American Dream”, as defined by James Adams in his 1931 book, was “a land in which life should be better and richer and fuller for everyone.” A disturbing study was released recently by a team of the nation’s leading economists at Stanford, Harvard and the University of California at Berkeley. The study reported that it has become extremely unlikely that this generation of American children will earn more than their parents, after adjusting for inflation.¹
The change over the last few years has been alarming and dramatic. If you were born in 1940, the probability of success was much better. Ninety-two percent of children at that time would do better than their parents. This was a virtual slam-dunk, regardless of whether the children went to college, got divorced, or suffered a layoff. The economy was growing strongly, and benefited the rich, the middle and working classes alike.
Unfortunately, this was short-lived. If you were born in 1980, only 40% of children would earn more than their parents. This lack of mobility hit the middle class more than the poor, and not surprisingly, struck the industrial Midwest states particularly hard. Going backward has now become the norm.
Paradoxically, this national glass ceiling is not due to a slowdown in growth, or a reduction of wealth. We actually have more wealth as a nation. Harvard economist, Nathaniel Hendren, found that the American economy is far larger and more productive than in 1980, and per capita Gross Domestic Product is almost twice as high.² He found that the reason for the growing gap was that nearly 70% of income gains from 1980 to 2014,went to the top 10% of the wealthy in America.
Wealth inequality is even more pronounced than income inequality. The richest 10% of American households owns a whopping 76% of all the wealth in the U.S.³ The source of net worth is also vastly different. The top 1% owns nearly half of the total wealth in stocks and mutual funds. By comparison, the bottom 90% holds most of its wealth in their principal residences.⁴ As a result, the Great Recession of 2008 and 2009 had little consequence for the wealthy, while it devastated hundreds of thousands of Americans who lost their homes.
Trump’s campaign tapped into the anxiety and anger of working Americans who felt that the American Dream was slipping out of their reach. However, he did not address the inequality. Hendren’s study of Trump’s tax-cut plans found that they would do little to improve the finances of struggling families. Instead, they disproportionately benefit high earners. This, combined with the loss of health insurance, the privatization of education, and other proposed changes may lead to more economic insecurity for most Americans.
What does this mean for your investments? If you have investments at all, count yourself among the fortunate few. Over half of Americans have zero money in the market, including money invested through pension funds, 401(k) accounts, Individual Retirement Accounts, mutual funds and Exchange-Traded Funds, as well as individual stocks.⁵
Investing in the market remains one of the few ways that you can participate in the growth of the economy, and keep up with inflation. For example, between March 2009 and now, if you were not invested in the market, you would have missed out on one of the strongest rallies in history. The Standard and Poors 500 Index, which tracks the 500 most well known publicly-traded U.S. companies, rose over 200%.
The biggest barrier to investing in the market is fear.⁶ People feel they don’t know enough about the market, or don’t trust stockbrokers and banks, or think it’s too risky. There are good reasons for this apprehension. Most financial advisors are not fiduciaries who are required to act in their clients’ best interests in order to keep their licenses and certifications. Clients could not be sure if the advice they were receiving, or the investments that were recommended to them, were the best-performing and least expensive choice to accomplish their goals, or best for the advisor. Positive change was in motion last year when the Department of Labor passed a ruling requiring any advisor who gave advice on retirement accounts to be a fiduciary. Trump opposes this ruling, and plans to reverse it or stall its implementation. In the meantime, investors must do their own due diligence and check whether their advisor is a fiduciary.
Many people are not aware that there are proven strategies available to reduce the volatility of the market and increase downside safety when they invest. These more conservative strategies, based on balancing asset classes and broad, global diversification, have helped families weather the ups and downs of the market, maintain their purchasing power in the face of inflation, and achieve their hopes and dreams.
If you have investments, congratulations! Work with your advisor to make your money work for you and capture some of the wealth of the nation for your family. If you are not investing, consider meeting with a fiduciary advisor to learn more about the benefits of planning and diversification. At the same time, keep in mind that many Americans are not as blessed as you, and support efforts to protect healthcare, civil rights and education for all people.
¹ Washington Post, 12/8/2016
² New York Times 12/8/2016
³ Organization for Economic Cooperation & Development, 5/2015
⁴ Household Wealth Trends in the U.S., Edward Wolff 12/2014
⁵ BankRate Money Pulse 4/2015
⁶ CNN Money 4/2015