The End of the Ultra-Rich?

The era of outsized returns may be over.

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Whoever imagined we'd need a term like über-rich? But it was certainly necessary to describe the vast wealth creation of a select group over the last two and a half decades. Thomas Cooley, dean at NYU Stern School of Business, writes in a recent Forbes column that "the share of income earned by the top 10 percent declined from a peak of nearly 50 percent in 1928, the height of the Roaring '20s, to a plateau of around 35 percent until about 1982. After that the share of the top 10 percent took off, reaching nearly 50 percent by 2006." But, Cooley notes, blaming the top 10 percent is a bit misleading--it's really "the top 1 percent where all the action [took] place."

Pimco's Bill Gross writes today about the role of leverage in these recent decades of imbalanced wealth generation.

Because our economy was still in a relatively early stage of leveraging, those who borrowed money and used it to invest in higher-risk yet higher-return financial or real assets didn’t require a lot of skill, they just needed to be able to convince a bank or an insurance company to lend them some money. After that, the secular wave of leverage would be enough to multiply their meager equity many times over and carry them to a beach where a fortune awaited them much like a pirate’s buried treasure.

This is bound to change, Gross writes: "Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400."

Gross warns that all investors should indeed expect "considerably lower" returns than they're used to. My colleague Kimberly Palmer has written about the possibility that the stock market may never again produce the kind of returns that we have long considered the norm. Gross also suggests investors may best make a model of Will Rogers, who once said he was less worried about the return on his money than the return of his money.

(For what's it's worth, although he's not to be confused with an investment advisor, Rogers did suggest to his friends: "Buy land. They ain't making any more of the stuff.")


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