Financial planners love to give examples about a hypothetical investor who placed $2,000 in the stock market every year since he was eighteen years old in 1950 and retired rich thanks to the stock market’s returns. They talk about the power of compound interest and getting rich slowly, investing in low-cost index mutual funds. There’s nothing wrong with this idea. In fact, for many people, it’s the best investment advice they’d be able to handle.
In 1950, the average salary was just under $3,000, so you could interpret this as an eighteen-year old needing $17,000 each year going forward starting today, based on 2010′s average salary. While $2,000 doesn’t seem difficult today, that’s in 1950 dollars.
Additionally, the number of investors putting money into the stock market over the past few decades has surged, thanks to low-cost investment plans, automatic 401(k) investments, and great marketing by the financial industry. While in 1950, only a small percentage of the population thought the stock market was the path to riches, that’s a more common philosophy now.
Thanks to the expanding the economy and everyone else who put money into stocks subsequently, that eighteen-year-old in 1950 was able to retire rich. The big question is whether the stock market can continue to provide long-time returns if there isn’t another surge of new investors and a rapidly expanding economy. But if you want to have those kind of returns, it may not be the stock market you need to follow — it may be the types of investments that the richest pursue.
Decades ago, the stock market was not the middle class playground it is today. As the flood gates opened and more people at lower income levels received access to stocks and mutual funds, the class of investors who formerly played in the stock market has moved onto alternative investments. I would place my bet on investments that are relatively out of reach for the middle class, like hedge funds and private opportunities. These will provide the historical returns financial planners tout, thanks to limited public interest and access.
Goldman Sachs is creating its own private market for shares in Facebook. Companies make their own markets all the time, but this is drawing extra scrutiny. Facebook is receiving the benefits of being a public company through massive capital infusion, but it isn’t subject to any regulation.
The Security and Exchange Commissions says that companies must report their financial results publicly if they have more than 500 shareholders — at which point any company might as well officially be public. Goldman Sachs seems to believe it can get around that requirement by pooling investors together. It sounds dubious, but for those who want the “full stock market experience” as it were, what upper-class investors enjoyed in the decades before the 1980s, a private market may be the only way to go.
Should Facebook go public? Do you think we need to follow the money — invest where the richest people invest — in order for our investments to pay off?
Photo: Hygiene Matters
Updated January 5, 2011 and originally published January 4, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.
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Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke, also known as Flexo, has contributed to PC World Magazine, US News, Forbes, and other publications. 
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{ 13 comments… read them below or add one }
The real rich people put the biggest chunk of their money in safe vehicles like bonds, they only invest their play money in stocks, hedge funds, or even private equities.
There are a lot of rich people who are content living off their safer investments in bonds, but the high-powered elite in the financial industry and many other wealthy individuals are not content with 4% to 6% returns — and the growth we’ve seen in the stock market in the past comes from those who take the riskier investments.
Facebook “might as well officially be public” is not true–they aren’t subject to all of the same requirements as a public company and aren’t beholden to stockholders like pension plans, institutional investors, etc. Just Goldman and some Russian tycoon.
Interesting! I would not invest in Facebook directly, only through a mutual fund..I try to keep single stock investments below 5% of my portfolio. This would prevent me from investing in hedge funds etc. My investments are similar to rich people except the dollar amount.
Hmmmm… I don’t see Facebook going public anytime soon, but it sure would be interesting if they did.
The rich have access to more types of investments. This is by design. This is what “accredited investor” status is. Though the sales pitch is to protect “unsophisticated” investors from high-risk investment, more to the point it acts as a barrier to entry, and props up the return of such investments because the demand for them is artificially kept low.
This article has less to do with “kids and adults” and more to do with “poor and rich.”
That was a metaphor. The point is that the barrier once prevented most people from investing in the stock market, but now that the stock market is more democratic in terms of access, we might not see those returns it has provided in the past.
MB.
Could you imagine what would happen to the hedge fund industry if every Joe was allowed to put their money into it? Hedge funds shut down regularly it would be a political nightmare
Hedge funds are a scam. Take a look at how many have failed over the years. Consider the asymmetric opportunity the managers have…. “Heads they win, tails you lose.” If the hedge fund does well, the manager does well. If the fund fails, the manager starts up another fund and you’re left picking up the pieces. “Wow, that sounds like a great investment… when can I get in,” said the Sucker.
Also, consider the survivorship bias that plagues hedge fund, stock indexes, etc. In addition, hedge funds, mutual funds, manage futures incubate funds and present to you the successful ones. They never show you all the funds they incubated that failed miserably and are now in the cemetery. My point: Don’t be a Sucker!
It seems like you are taking a lot of flak for this article from people who probably know what they are talking about. As a person who only knows a little about investing, what you are saying definitely makes sense to me from a simplified point of view.
Only time will tell if you are right and stock markets eventually cool off when demand stops increasing at such a great rate or even declines. I wonder . . .
When I hear rich people invest, I think Madoff…..which isn’t a confident association, I know.
Interesting article! I’m just getting interested in investing, so I appreciated the viewpoint.
I think you had a valid point from a simple viewpoint. Something I appreciate since I am not very experience in investing. I had not thought about the stock market cooling off and the effects demand may have, thanks for the article.