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What the Middle Class…

What the Middle Class and Some High-Income Earners are Missing from their Investment Portfolio.

Not only is the middle class shrinking, but their net worth is as well.

A recent study from the Pew Research Center showed the middle-class is no longer in the majority. That’s a far cry from 1971 when middle-class Americans represented 62% of the population. In 2017, the middle class only represented 49% of the population.

Aggregate wealth for the middle class is shrinking even faster than its numbers. According to Pew’s research, in 1970, middle-class households represented 62% of all wealth compared to just 43% in 2014.

The problem is, the middle class, and even some high-income earners are often at an investment disadvantage.

Some high-income earners work so many hours and are so distracted that they overlook the types of investments that will free them from their jobs.

Take, for example, the physicians who are laser-focused on their practice; lawyers focused on becoming partners, and c-level execs climbing the corporate ladder. They put so much effort into their work that they invest in what’s easy.

High-income earners overlook passive income investments that their entrepreneur peers like and real estate friends are heavily invested in. Their investments generate the type of passive income that will allow them to one day work only because they want to and not because they have to.

Some high-income earners like doctors, lawyers and middle management will never escape the rat race. They will never stop trading time for money unless they find passive income streams.

For high-income earners, time is the challenge. For the middle class, it’s priorities. In order of financial priorities, the middle class lists the following as their top 4:

  1. Home Ownership
  2. Vacations
  3. College
  4. Retirement

The middle class considers their home their most significant investment. The average American is more likely to own a home than to have saved enough money for retirement. Did you know that only 45% of middle-class Americans have an investment account?

For many Americans, their house is their retirement plan, which is not a great idea.   

Many are counting on the value of their nest egg to balloon enough to fuel their retirement. However, if they plan to sell the house and live off the appreciation, they may be in for a surprise if that’s their only form of retirement.

For one, they will need a replacement home. New home prices would also appreciate, even if downsizing. This would wipe out much of any appreciation the homeowners were banking on to fund their retirement.

The other problem is that if they plan to live in their current home during retirement and only have social security as their sole income. The house becomes a liability because it will continually require repair.
They still need money to pay taxes, to replace the roof or a water heater, etc.

As every homeowner knows, even though they paid it off, it isn’t free.

Much of the middle class and high-income earners are not investing for retirement. The ones that do are missing one key element that will prevent them from retiring comfortably, if at all.

They will either take the 401(k) or IRA path to retirement or rely on costly financial advisors. Some will dabble in day trading and others still will be drawn to sexy, flavor-of-the-week investments like crypto, blockchain or gold.

Most of these investment strategies are either under-performing or speculative. All of them lack the one element that sets the wealthy apart from everyone else: income. It’s the very rare Black Swan that is a member of the ultra-high-net-worth investor (UHNWI) club with a portfolio that isn’t focused around income.

To them, any investment without an income component is just speculation, and they might as well go to Vegas if they want to gamble. They would rather control their own odds.

That’s why the following are not part of the UHNWI wealth building strategy:

  1. Gold – no income
  2. Crypto – no income
  3. Non-Dividend Stocks – no income
  4. House – no income
  5. Mutual Funds – no income
  6. Fine Art – no income
  7. 401(k) – no income

Many of the above examples of non-income-generating investments rely on appreciation to make money. It’s a gamble to rely on a greater fool down the road paying more for an asset than what they paid for it.

The rich don’t speculate. They would prefer to focus on income-generating investments like:

  1. Commercial Real Estate
  2. Running a Business
  3. Private Equity with Income Component
  4. Private Lending
  5. Agricultural Interests

The wealthy prefer these income-generating investments because they’re an alternative to Wall Street.

Not only are they less correlated to recessions and downturns than their Wall Street counterparts, but they also provide better risk-adjusted returns.

The wealthy know that to build generational wealth that will last several generations and not several years will require income-generating investments with compounding returns through reinvestment.

Income investments are essential for leaving the ranks of the middle class.

If you’re missing this key element, start focusing on income investments today.

Investing for growth,

Michael Foley

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