Here is an interesting factoid: If you perform a regression analysis of the returns of investors portfolios with all kinds of variables, one thing tends to be a significant driver of higher returns. Investors who are wealthier at the beginning tend to have systematically higher returns than poorer investors.
I think another factor is also that wealthier investors tend to have a much larger cushion (more cash in bank and ability to cut down on optional expenses) in drawdown scenarios and hence are much more risk tolerant, which allows them to have a longer-term view when it comes to investing or take on riskier assets. Paradoxically, the ability to take risk is lower for less wealthy investors even though financial theory says that they should take on more risk to increase their level of wealth.
1. I agree with @Justin Yang. On the sequence of return risk alone, the poorer investors who have no recourse but to liquidate investment during the worst points e.g. 2008 plus they cannot deploy capital at the bottom e.g. March 2009 or say, May 2020 makes their return worse. But those who can hold (or at least not be paper hands), can follow DCA and heed Buffet to buy an SP500 ETF would have kicked ass for the time interval chosen.
2. The wealthier investors actually are more financially educated. Formally or otherwise, e.g. by mimicking their parents that accumulated wealth and wisdom.
The school system does not educate ordinary citizens about money and investments. Poorer people also put their time to get educated on vocational or white-collar employable skills, rather than putting time into learning about investing. They need to get employed so they can waste more of their time working for a mindless task so they can pay off their student loans (which by the way, the rich do not have and so they can choose carefully employment opportunities and maybe select those that will enhance their knowledge rather than get a grunt job).
So much so a substantial portion of the poorer investor class ends up more like gambling and speculating, rather than investing.
3. Really, it is hard to dream when you are trying to survive.
I grew up dirt poor. So I know this first hand. The fortunate thing is I have a healthy skeptical, curious scientific mind. So I never believed half the tales that other people fed me when I was growing up...unless I can check it out for myself. I thought I will engineer my escape velocity out of poverty and I kinda did. (Eh...still doing it). But I have been at least free enough to make my choices for many years now.
4. Lastly, certain life-changing opportunities are only given to "accredited investors" and otherwise inaccessible to ordinary, poor people. PPM would account for some much higher ROI for affluent investors. This nonsense should be democratized as well. Crowd investing is trying but we are still in the infancy stage overall.
But to be fair, there are wealthy people that actually crashed and burned. Especially 3rd generation inheritors that only understood how to burn money but never bothered to learn how to invest and behave prudently, just like their elders.
Justin & Em5K are absolutely correct regarding sequence of risk being a big factor. I can't find it right now but a couple of years back (pre-pandemic) I read a paper that specifcally identified "personal survivability" as the largest factor driving expanding wealth inequality. You don't run into many lower income angel investors ... yet. Improved regulatory structures might allow small ticket, liquid investment options to asset classes where the ability to survive sequence of return has been a barrier to widely-based investment.
I think your Mr Yosef is in the pay of the industry. IFAs are only good at preventing you from making blunders, but we all know they are terrible fund selectors. Look at the performance of funds of funds ! A better explanation of the better performance of rich people is that the ivest more in single companies and index funds and so avoid having to support the armies of intermediaries, in the station to which they have been accustomed.
I think another factor is also that wealthier investors tend to have a much larger cushion (more cash in bank and ability to cut down on optional expenses) in drawdown scenarios and hence are much more risk tolerant, which allows them to have a longer-term view when it comes to investing or take on riskier assets. Paradoxically, the ability to take risk is lower for less wealthy investors even though financial theory says that they should take on more risk to increase their level of wealth.
1. I agree with @Justin Yang. On the sequence of return risk alone, the poorer investors who have no recourse but to liquidate investment during the worst points e.g. 2008 plus they cannot deploy capital at the bottom e.g. March 2009 or say, May 2020 makes their return worse. But those who can hold (or at least not be paper hands), can follow DCA and heed Buffet to buy an SP500 ETF would have kicked ass for the time interval chosen.
2. The wealthier investors actually are more financially educated. Formally or otherwise, e.g. by mimicking their parents that accumulated wealth and wisdom.
The school system does not educate ordinary citizens about money and investments. Poorer people also put their time to get educated on vocational or white-collar employable skills, rather than putting time into learning about investing. They need to get employed so they can waste more of their time working for a mindless task so they can pay off their student loans (which by the way, the rich do not have and so they can choose carefully employment opportunities and maybe select those that will enhance their knowledge rather than get a grunt job).
So much so a substantial portion of the poorer investor class ends up more like gambling and speculating, rather than investing.
3. Really, it is hard to dream when you are trying to survive.
I grew up dirt poor. So I know this first hand. The fortunate thing is I have a healthy skeptical, curious scientific mind. So I never believed half the tales that other people fed me when I was growing up...unless I can check it out for myself. I thought I will engineer my escape velocity out of poverty and I kinda did. (Eh...still doing it). But I have been at least free enough to make my choices for many years now.
4. Lastly, certain life-changing opportunities are only given to "accredited investors" and otherwise inaccessible to ordinary, poor people. PPM would account for some much higher ROI for affluent investors. This nonsense should be democratized as well. Crowd investing is trying but we are still in the infancy stage overall.
But to be fair, there are wealthy people that actually crashed and burned. Especially 3rd generation inheritors that only understood how to burn money but never bothered to learn how to invest and behave prudently, just like their elders.
Justin & Em5K are absolutely correct regarding sequence of risk being a big factor. I can't find it right now but a couple of years back (pre-pandemic) I read a paper that specifcally identified "personal survivability" as the largest factor driving expanding wealth inequality. You don't run into many lower income angel investors ... yet. Improved regulatory structures might allow small ticket, liquid investment options to asset classes where the ability to survive sequence of return has been a barrier to widely-based investment.
I think your Mr Yosef is in the pay of the industry. IFAs are only good at preventing you from making blunders, but we all know they are terrible fund selectors. Look at the performance of funds of funds ! A better explanation of the better performance of rich people is that the ivest more in single companies and index funds and so avoid having to support the armies of intermediaries, in the station to which they have been accustomed.