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The Two Levels Of Rich That Doesn’t Rely On Index Funds

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It’s safe to assume the vast majority of you reading legitspend want to be rich. I trust those of you who’ve been reading this site, will have something to share about index funds and investment strategies, which have indeed become much richer. The compounding forces since then have been enormous

We are probably one of the richest communities on the internet today based on all the surveys conducted. For example, 35% of you have a net worth of between $300,000 – and $1 million. While 25% of you have a net worth of over $1 million. Not bad compared to the median net worth figures

Despite our good fortune, it’s worth discussing the two levels of rich. Because since I started this site, it’s clear one level of rich has pulled far ahead. And that one level of rich didn’t do so by investing in index funds.

Index Funds And The Rich

I know we all love index funds. They are the personal finance community’s recommendations for where to invest our money in stocks. However, it’s hard to get really rich off index funds alone. But let’s start by knowing what is Index funds.

What Is an Index Fund?

According to Investopedia. An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses, and low portfolio turnover. These funds follow their benchmark index regardless of the state of the markets. 

In my opinion, if you want to achieve financial independence before the retirement age of 65, investing only in index funds might not fit your expectations.

The only way to get rich sooner off index funds is to consistently invest large sums of money. But that’s kind of like saying to get richer, you got to be rich. Investing in index funds is what middle-class people do who don’t know what to do.”

Views On Index Funds

I’m a fan of index funds. Over a 5-year period, the majority of active financial managers underperform respective indices due to high fees and poor investment skills. However, leaving my job could be the best option for me, and staying unemployed.

My view about investing in index funds is for a low-cost, lower-risk way of investing in public equities. Investing in an S&P 500 index fund or ETF would be my best option when buying the dip, but that’s not a strong conviction for me.

I know some people might be wondering what S&P 500 is. Well, I have answers to that.

What Is the S&P 500 Index?

The S&P 500 Index was launched in 1957 as the first U.S. market-cap-weighted equity index and is widely regarded as the best single gauge of large-cap U.S. equities. As the most influential equity index in the world, the index has trillions of dollars indexed or benchmarked to it

There top 5 constituents of the S&P 500 by index weight which I will be sharing with you

  1. Microsoft
  2. Apple
  3. Amazon
  4. Tesla
  5. UnitedHealth Group Inc.

Let’s look at some of the Advantages and Disadvantages of Index Investments

Advantages of Index Investment

  1. Low cost
  2. Requires little financial knowledge
  3. Convenience
  4. Diversification

Disadvantages of Index Investing

  1. Lack of downside protection
  2. No choice in the index fund’s composition
  3. No choice in the index fund’s composition

Index funds are like a pleasant tailwind that can push you towards ever-moving financial independence.

The Two Levels Of Rich Includes

1) First Level Rich: The Mass Affluent

The first level of the rich is what I consider the mass affluent class. The mass affluent class is highly educated, motivated, and upwardly mobile. The mass affluent class is considered rich by general standards but often doesn’t feel rich.

Today, the mass affluent class has investable assets of between $500K – and $3 million. The mass affluent class also has a net worth of between $500K – and $5 million. The range is largely dependent on age, location, and household (single versus couple)

For the most part, the mass affluent class is a great place to be. You’re comfortable and always have hope for a wealthier future.

2) Second Level Rich: The Truly Rich

The second level of rich is what most people think about when they hear the word rich. We’re talking vacation homes in the Hamptons, first-class flights, $100,000+ automobiles, and generous donations to charity where your name appears on a wall.

Let’s call the second level of rich the Truly Rich. The truly rich have investable assets of at least $5 – $10 million and a net worth of at least $10 – $25 million, depending on location, age, and household.

In terms of wealth creation, the top 0.1% and 0.01% have trounced those in the top 1%, never mind the 99%. For those folks with incomes and net worths between my two definitions, you are free to call yourself whatever you want.

The top 1% by wealth

Researchers’ calculation of US household average (2010 dollars)

Index Funds Are Mostly For The Mass Affluent

I actually don’t know a single person who is worth over $10 million who has a majority of their investment assets, let alone net worth, in index funds. Conversely, I know plenty of people with net worths below $5 million who either only invest in index funds or only have a combination of index funds and real estate.

References

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