The number of articles written on income inequality has skyrocketed lately. It is widely admitted that the millennials generation is poorer than their parents and grandparents on a relative basis. Given that far fewer women invest in men, women are hugely disadvantaged when it comes to generating life time returns.
And how does that affect why your decision to invest?
Below is the return chart of S&P 500 from September 2006 to today, September 2016. The annualized return of S&P 500, through this period, including the great financial crisis, was 5.27%. If you put $100 in late 2006 into the stock market back in 2006 and look at the account today. It would have grown to $167. The average raise in salary in America, over similar period, was about 3% annualized per year. (Data available at: http://www.tradingeconomics.com/united-states/wage-growth) This means if one earned $100 back in 2006, one is likely to earn $134 today. In the last decade in America, the return on labor is less than the return on investment. So an average working person is earning less than his/her passive investment!
Why is this the case? The commonly listed reasons are 3 folds:
- Globalization has made the outsourcing of labor much easier. In the past 3 decades, many large corporations have moved manufacturing and even basic servicing functions overseas, to China, the Philippines, India, Vietnam, Indonesia etc. where labors are cheaper. This compressed the return of your labor work, but increased the bottom lines of most of these companies, which led to a general increase in stock prices. ( That was also the reason why most of the returns went to the top 1% of the country, because they are far more likely to own large investment portfolios than the rest of the population.)
- Capital is far more mobile than labor. It tends to go where the return is the highest. If you have taken Economics in school, you would know that labor market is somewhat “sticky”. For companies to hire and fire workers, they have to undergo recruitment, training. If they let people go, they often have severance packages. Capital is far more flexible. If one likes a company, one buys the stocks, options or bonds of the firm, if not, one sells or shorts the stocks, options or bonds of the firm. You can work 10, 12 or 15 hours a day, earning $20, $25 an hour. A trader could make your entire salary (or most likely more) by researching and clicking a button.
- Robots and AI are already here. They will keep salaries depressed, but increase return on capital. Because robots are frequently competitors to the working population, their existence will keep most of our salaries low. However, this also leads to decrease in labor costs for corporations, which could maintain higher profits and shareholder returns.
Lesson? Be a shareholder yourself. Be a bond holder yourself. Start investing today! If you want your savings to work for you while you are sleeping, go open an investment account. You don’t have to be an expert and pick stocks. You could start by selecting a few ETFs (Exchange Traded Funds http://www.investopedia.com/terms/e/etf.asp).
Take advantage of the capitalistic society we live in. Start investing now!