What Are the Core Elements of Wealth?

As the old adage says, “It takes money to make money.” You don’t have to be wealthy to invest, but you have to invest to be wealthier.

Many Americans are losing the asset accumulation battle. The inflation-adjusted net worth of the median household declined 36 percent over 10 years, according to a New York Times article, citing a study by the Russell Sage Foundation.

Net worth is a measurement of wealth, the value of everything you own minus what you owe. In 2003, the median household net worth was $87,992; in 2013, only $56,335. The Times does not detail the cause, except to note that most of the damage occurred after the 2008 recession, which slammed home values.

A 2012 Wall Street Journal piece pegged the top 5 percent with at least $1.9 million in net worth or $209,000 in income. It is difficult to know what was included in net worth. Investment advisors are required by regulators to exclude a primary residence from net worth for suitability purposes related to the risk in any investment.

By the reckoning of the Securities and Exchange Commission, a wealthy person is a little less rich. The SEC’s definition of an “accredited investor” concerns who is qualified to invest in more complex and potentially more risky investments, such as a hedge fund. To the SEC, a person or couple qualifies with a net worth exceeding $1 million, not including the primary residence, or a person with income exceeding $200,000 in each of the two most recent tax years with expectation of that continuing ($300,000 for a couple).

The Russell Sage study also points out the net worth of the households in the top 5 percent gained a fairly robust 14 percent. Why? Much of the gain for those who saw net worth increase comes from a rising stock market.

According to a similar 2013 Pew Research study that tracks household net worth, the discrepancy of wealth growth is indeed a result of the stock and bond market rallies. While wealthy households typically have their assets in financial holdings, such as stocks, bonds and 401(k) accounts, less affluent households’ main source of wealth is the value of their home.

Stocks still rank as a primary tool of for beginning investors and the top 1 percent alike. Yes, some people are struggling just to make ends meet. But those who can put aside money, even small amounts, should start investing. Retirement accounts, such as 401(k), and other savings plans have modest entry requirements.

Even experienced investors can get it wrong when it comes to stocks. Stocks go up and down. Short-term investors tend to see the market as risky when prices decline. Long-term investors like the legendary John Templeton instead view declines as an opportunity to invest at potentially attractive prices. Many of those who benefited from the recovery bought assets when others were selling and running for safety.

Aside from stocks, a closely held business enterprise and real estate continue as core elements in wealth building. Running a business is a decades-long commitment, and you should be passionate about your calling. Investment-oriented real estate, for those qualified and who can handle a lack of liquidity for a period, is attracting attention relative to supply/demand imbalances, post-2008.

A vital component to wealth building is protecting it. Prudent insurance protection shields you and those you love from the vagaries of life, including accidents and property damage, injury and disability, premature death, lawsuits, and health-care costs. Write down a check list of “What if?” questions on personal or family protection and tax-saving moves.

You should use working capital and savings reserves to cover your short-term needs, while growth engine and inflation hedge investments should be in longer-term buckets, with horizons of seven years or more.

The good news is that the economic pie is dynamic, not fixed. We still live in one of the greatest economies on earth, which allows anyone with resolve to rise above the median in any measure.

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Written by Lewis Walker, CFP. Lewis Walker is president of Walker Capital Management LLC, Peachtree Corners, Ga. Securities and certain advisory services offered through the Strategic Financial Alliance Inc. (SFA). Lewis Walker is a registered representative of SFA, which is otherwise unaffiliated with Walker Capital Management. 770-441-2603. lewisw@theinvestmentcoach.com.

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