Insights from the Wealth Composition of the Top 1%
- Wealth is built non-linearly through the acquisition of the right assets. Business equity, financial assets, and real estate are the most popular instruments of the 1%.
Nick Routley from Visual Capitalist has recently published a great chart that uncovers the wealth composition of individuals with net worth from 0 to 10M+ USD. A few points here come to mind as the never-ending debate about asset mix in the financial industry continues.
Wealth is assessed in blocks of assets, some of which turns out to be more common between low and middle income and others seem more common with the ultra HNWI. Middle-Income households (0–500K net worth) account for the majority of the population, followed by the Upper Income (500K to 10M) and finally, a point of a percent is the Ultra Rich (10M+).
In brief, the main asset classes pictured summarize the calculations collected by Edward N. Wolff in a paper published in 2017. The classes are:
- Principal Residence;
- Pension Accounts — IRA, 401(k) plans;
- Liquid Assets — checking accounts, savings accounts, etc;
- Miscellaneous Assets — precious metals and collectibles;
- Stock, Securities, Mutual Funds and Trusts
- Business Equity and Real Estate
As the individual moves up to the wealth ladder, certain trends appear. Primary residence weights less and less, from an astounding 61.9% to a mere 7.6% for the Ultra Rich. Pensions accounts also decrease in weight as securities and business equity increase dramatically. These latter in particular have about 80.4% of their net worth tied in financial assets or real estate.
Here something to think about:
Is wealth necessarily built in sequential blocks?
Does wealth accumulation require the linear progression that is shown by data? In other words, do we need to progress from residence equity to business equity necessarily? A number of financial planning literature textbooks stresses the idea that home equity is the primary desiderata when comes to wealth creation. Without a doubt, home equity is a good form of equity but as we speak fortunes in the tech industry have been created by progressing non linearly across asset classes. Businesses are created, grown and sold at a speed that was never possible before. Securities and financial instruments have never been as accessible as today and financial literature is available to explore like it never was before. So, no, I believe that wealth creation is a non-linear process that is powered by technology and scale economies.
Everybody Diversifies
Diversification of assets holds as a principle and represent one of the longest existing tenets for effective risk management and wealth creation. Rock on!
Business Equity is urgent
The higher the net worth, the higher the proportion of business equity to total assets. Individual with a net worth of 500k+ range between 25.5% to 49% of total assets held in business equity. This shouts to our faces that wealth is created by businesses and seems to be the most interesting takeaway. Now stop reading and start a business.
Buy stocks now
Investing has a special position as well, ranging between 18.6% and 31.4% of the assets held by individuals with a net worth of more than 500K. Financial assets maintain stability and represent a favorite asset class of the wealthy population.
Debt is still risky and needs control
An aspect that the infographic is not taking into account is the household debt analysis that is covered by Edward N. Wolff — see Table 4. He uses the Debt / Net Worth ratio to unveil some interesting insights: the Ultra Rich have a ratio of 2.4%; the Upper Income of 10.1% and the Middle 3 Quintiles -i.e. Middle Income and Lower Income combined — of 58.9%. This does not mean that debt is evil but it definitely shows that people that have built fortunes understand the risk profile of debt and use it accordingly.
