One of the most striking features of the current economic meltdown is the growing chasm between the rich and the poor. To those who study social economics, it is well-known that the middle class is disappearing.
Although the demise of the middle class has come to light only recently, perhaps the decline has been taking place for many years. We are only now realizing the widening gap in wealth due to the slowdown in the economy.
When times are good, nobody complains.
In fact, it is interesting to note the effort of large companies to provide the appearance of wealth by bringing luxury goods to the mass market. Hey, give the middle class a taste, and maybe they won’t realize how far behind they really are.
Well, we are now realizing how far behind the middle class really is. With massive debts and falling home prices, the impact of negligible savings becomes quite large.
Saving Regularly Is a Key Wealth-Builder
It is that savings (or lack thereof) that makes a real difference. The power of appreciation, equity ownership and the time value of money provide the most lift for the wealthy.
The absence of real savings invested is the real reason the middle class is lagging in wealth creation. The irony is that at a time when astute investors and the wealthy are deploying capital to prey upon the weak, the middle class is struggling to make ends meet. They are truly living paycheck to paycheck.
Thus, if the middle class expects to make any gains on the wealthy, personal balance sheets must be repaired, debts eliminated and investments increased. Assuming that incomes grow as a result of productivity, the middle class can indeed recover (for easy tips to get started, see “7 Simple Steps for Greater Wealth (and Safety)“).
If the middle class has dollars available to build wealth how do they achieve higher socia-economic status?
Owners Get Richer Than Lenders
Many a book has been written supposedly providing the pathway to riches, but the only proven way to reach financial independence requires ownership. Those that thrive under capitalism, do so by owning companies (see also, “The Formula for Building Long-Term Wealth“).
In most cases, that means becoming a business owner of some kind no matter the size or scope. Any success is usually followed by investments in other privately operated business and extends to ownership in equities via the stock market.
Certainly, we have seen stock market participation increase greatly over the last few decades. Unfortunately returns over the last several years have put to the test the value of equity ownership (see also, “You Still Need Stocks, Just Not the Headaches!“). It is true that the publicly traded stock market does not provide the same growth opportunities as say ownership of privately held business, but it is the only game in town for those with smaller dollar amounts to deploy.
The system is a bit rigged against a middle class that by definition has no choice but to speculate in the stock market as the vehicle to achieve equity ownership. It is imperative then that those owning publicly traded securities do so wisely. Essentially if we are to win the game, we must beat the market despite those who say the market can’t be beat.
Where to Start…and What to Avoid
It is a fools game to own index funds because returns in the market in general will do very little to help you rise to the status of the upper class (see also, “Indexing vs. Active Management“). Superior returns compounded over time will get that job done and get it done in a big way.
Another way to win the game is to stick to small-capitalized stocks. Historically, these smaller capitalized companies trade for lower valuations allowing for a larger ownership position or greater diversification depending on your preference.
Growth is an undeniable trait of capitalism, thus the small get big. If we can buy small at a cheap price and hold until small becomes big, we will usually beat the market. Of course there is risk in such a strategy, but again there is no reward without taking risk.
Today, with small-cap stocks taking a beating over the last year or so, it would seem to be a wise and Rational strategy to pepper your portfolio with small-cap stocks. I can pretty much guarantee that the wealthy have been doing this since the start of July as evidenced by the outsized gains in the Russell 2000 small cap index.
Building wealth is not hard. It takes discipline, patience and the ability to beat the market. The advisors here at InvestorPlace can help you do just that.
This article was written by Jamie Dlugosch, Editor, InvestorPlace.com. For more actionable insights likes this, go to: www.InvestorPlace.com.
