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Who Really Benefits from Inflation and Why You’re Not Wealthier

By Sasha Cekerevac | Small Business

Who Really Benefits from Inflation and Why You’re Not Wealthier image Federal Reserve1Who Really Benefits from Inflation and Why You’re Not WealthierThe Federal Reserve Bank of St. Louis released an interesting report analyzing the underlying fundamentals of why America’s economic growth level still remains quite anemic. The results won’t surprise many people—most American households have rebuilt only a fraction of the wealth lost during the recent recession.

According to the Federal Reserve Bank of St. Louis, household net worth peaked at $67.4 trillion during the fourth quarter of 2007. Household net worth then sunk to a low of $51.4 trillion in 2009, and has since rebounded to $66.1 trillion. (Source: “Annual Report 2012,” Federal Reserve Bank of St. Louis web site, May 2013, accessed June 6, 2013.)

While it appears that nominal net worth has recovered 91% of the losses, the St. Louis Federal Reserve notes that this is not an accurate representation of either household wealth or economic growth.

Since inflation was present during this time—for a total of two percent per year over the last five years—and the number of households increased by 3.8 million, the real recovery rate is only 45% of household wealth, according to the St. Louis Federal Reserve.

Why is economic growth still lagging, and why don’t most Americans feel wealthier? As the St. Louis Federal Reserve reports, the vast majority of the gains have been in the stock market. Because the stock market is primarily an investment for a relatively small number of Americans, this leads to significant differences in wealth creation.

Increasing or decreasing wealth is just as important as income for economic growth. Because a large percentage of the population has not had an increase in total wealth or has not seen improvements in their balance sheets, economic growth remains stagnant as there is continued uncertainty throughout the economy.

As I’ve stated in these pages many times before, one needs to have a well-diversified portfolio. An example of a mistake made by those who have not participated in the recent wealth creation is the high percentage of residential real estate that is making up many investors’ portfolios.

According to the report by the Federal Reserve Bank of St. Louis, young, uneducated families have approximately 70% of their portfolio in residential real estate, as compared to 30% for older college-educated families.

This helps explain, at least partially, why wealth is not spreading evenly among all Americans. Most investors’ portfolios are simply not diversified enough and are not exposed to the stock market, among other assets.

Below is the chart for the S&P 500 Index:

Who Really Benefits from Inflation and Why You’re Not Wealthier image SP 500 large Cap Index ChartWho Really Benefits from Inflation and Why You’re Not Wealthier

Chart courtesy of www.StockCharts.com

This lack of wealth creation across all demographics is leading to uncertainty for many Americans, creating a drag on economic growth. While the Federal Reserve has done essentially what it can to help restore wealth, because only a small percentage of the population benefits from these efforts, it leads to an uneven injection of stimulus for economic growth nationwide. In other words: some of the population benefits, while many others do not.

While the stock market did crash significantly, bottoming in 2009, long-term investors with a diversified portfolio took this opportunity to hold and even continue buying stocks when they were cheap. Since older and educated investors have only a small percentage of their portfolio in their residential real estate, this diversification has allowed them to participate in the wealth creation that has occurred over the past few years.

The real message for the long-term investor is not to focus all your energy and attention on the current level of economic growth or even what the Federal Reserve is doing, but instead, ensure you have a well-diversified portfolio and a variety of different assets. Picking the best assets in a variety of sectors can help increase the probability of long-term wealth generation.

This article Who Really Benefits from Inflation and Why You’re Not Wealthier  was originally published at Investment Contrarians

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