How do the rich get richer quicker?

There are a few studies that show that the richer you are the better your investment returns – Thomas Piketty the French economist is probably the most well-known author in this space.

A recent Vox article digs into these returns using detailed Swedish data and essentially finds the same thing. The top 5-10% of households do 2.7% per year better than the median, the top 0.5-1% do 4.1% per year higher than the median and the top 0.01% do 6.2% per year better.

But the detail is where it gets interesting, and confirms Piketty’s suggestions – the return can be explained by the asset allocation. Basically, the richer you are the more risky assets you hold and so the higher the returns – especially at the pointiest end where significant private companies are owned.

risk vs return by household wealth bracket

So, if you are trying to make it onto the rich list the good news is that there is no sign that the rich have some stock-picking secret – on average they get the same returns as most investors, they just take more risk. The bad news (if you are trying to make it onto the rich list) is that the really high returns are usually if you are the founder (or inheritor) of a private company – just dialling up the risk on the stock market is unlikely to get you there.

Damien Klassen is Chief Investment Officer at the Macrobusiness Fund, which is powered by Nucleus Wealth.

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Integrity Private Wealth Pty Ltd, AFSL 436298.

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  1. Know IdeaMEMBER

    Sounds about right. Certainly, the wealthy people I know have been or are operating private companies or invest heavily in that sector. It is hard work, but the financial returns are pretty good if you have the stomach for it. Working for a salary is a great way to make someone else wealthy.

    It is presently the golden age for capital. How long can it last?

  2. lol, nothing like taxation to destroy capital. For all the the bleating about equality on this blog and how we have to tax more so capital is shared across the economy, all your doing is destroying the capital of lower and middle classes – ensuring they will ever be able to accumulate wealth…!

    Well done lefties

    • You argument is no more useful than that of the left you seek to castigate, lisinopril.

      Taxes on ‘capital’ as you have it ARE destructive. But we will get nowhere until we recognise there are three factors of production: Labour + Capital + Land.

      Taxes should fall on the economic rents derived from land, natural resources and government-granted monopoly. There is more than enough here to fund the entire cost of government.

      If the free ride of economic rents is taxed away, capital will divert its attention to (hopefully untaxed) entrepreneurialism. We get a super-dynamic economy and opportunity for all. I’d like to see that!

      • Well summarised there david. Indeed, we should be removing taxes on productive activity and applying them to economic rents. Seems so simple, yet it isn’t done…

    • Tassie TomMEMBER

      “all your doing is destroying the capital of lower and middle classes – ensuring they will ever be able to accumulate wealth”

      I think you’ve absolutely contradicted yourself. Wealth IS capital. If the lower and middle classes are unable to ever accumulate wealth (capital), then they by definition cannot have capital (wealth) for taxation to destroy.

      Which is beside the point – capital is currently either untaxed (bank account, shares, PPOR, agricultural land) or very minimally taxed. It is only the earnings on capital that are significantly taxed, and also land tax on the very small proportion of land that does not have a land tax exemption.

  3. The study derived from Swedish Wealth Tax data Damien cites is outstanding and I commend it to all. There is genuine insight here into the behaviour of the wealthiest who usually refuse surveys and resist data collection.

    Better to read the original rather than the VOX precis:

    Even among the 1%, many remain reliant on labour income. But this data set is better than that. The 0.1% DO enjoy superior returns – not because of inside knowledge (which they tested for, up to a point) but because of their ‘idiosyncratic’ attitude to risk. They are willing to invest where risk/reward is in their favor because their bets are diversified, uncorrelated.

    You too can invest like the big boys, by using this powerful insight. You only need $20k and can enjoy +6% premia.

    Interesting observation that middle-upper income earners enjoy higher RE returns than the 90-99% due to higher gearing.

    The angry railing by the left about the 1% would be more nuanced and pointed if they read (and understood!!!) this study.

    At this point in the cycle, investing/asset building in land is futile. Here is the better path.

    Don’t Buy Now!

    • Know IdeaMEMBER

      The other great thing about capital in the present environment is that gains are only taxed at about 25% for individuals or 30% for corporations, whereas income is taxed at much higher marginal rates.

      Build up a business, enjoy the income it generates in that period, and sell it off at many multiples and pay much less tax than you would staying in the business for that additional time. Then you have capital to go and do it all again, but this time based from Palm Beach not West Ryde. What is not to like?

      And I do make it sound so easy, which it isn’t. You really do have to embrace risk, and the real likelihood of burning a big lump of money and time.

  4. The obvious thing that is missed is the rich folks have the ability to allocate to high risk and if they fail 3-4 times they still have a good chance to come back. Joe average makes a punt, loses and that could be the end before the mortgage and bills sink him entirely.

    take the housing ponzi for example. Any rich folks who have piled in can probably see through the next crash however nasty it might be. Someone who is a relatively new investor will get sunk hard.

  5. Pikkety is a fraud.

    These inequality fetishists intentionally turn a blind eye to the dynamics of the rich-list. Today’s rich-listers may be even richer than they were a decade ago in the wealth they have acquired, but the composition has changed.

    The people who were once rich-listers might not make the cut any more, and successful start-ups bring about the newest members.

    So inequality is not some long-term issue where the so called rich manage to rig the system to protect their position and wealth. In the long term, markets punish failure and reward success.

    Unless of course you are one of our senior public servants earning $800k a year and guaranteed a job for life.

  6. DominicMEMBER

    Piketty. Lol

    Wealth inequality boils down primarily to the inflation of the money supply via the fractionally reserved banking system. Inflate the money supply: inflate asset prices. Who owns all the assets? Bingo.

  7. kiwikarynMEMBER

    Have been watching this in action recently with some of my very rich mates, who are investing in highly illiquid companies on the stock market. They are prepared to take the risk that they cant get out of those investments in the event of a market crash, and in return, those companies will more than likely outperform the market. Whereas me, who is not so rich that I can afford to tie up my capital for years, or able to weather capital destruction on a large scale, avoids investing in these companies completely. There is a certain point where you realise you can lose half or three quarters of your net worth and not see an impact on your everyday life, and once there these people are then free to go far out on the risk curve.