Do You Feel Wealthy Again?

Do You Feel Wealthy Again?

The Federal Reserve just released its quarterly financial accounts report. Household net worth – which includes Americans’ home values and savings, less liabilities such as mortgages and credit card debt – rose to $74.8 trillion. We are now, according to this measure, wealthier than at any point in history. And we’re $6.7 trillion wealthier than we were in the third quarter of 2007, the pre-recession peak.

What’s driving the majority of these gains are climbing stock prices and rising home values. Stocks have seen their biggest gains since 1998. The Case-Shiller index of housing prices in 20 cities rose 12.4% in July compared to the same month in 2012, the most in more than seven years. Cheaper borrowing costs made possible by the Fed’s record monetary stimulus have contributed, as has a steady (albeit slow) decrease in the unemployment rate. These gains have come in spite of higher payroll taxes together with across-the-board federal spending cuts this year.

The biggest beneficiaries of this economic largesse have been, unsurprisingly, homeowners and stock investors. Unfortunately, homeowners now represent less than half the population, and many investors, still stung by the 2008 crash, have eschewed stocks for safer but much lower-yielding investments such as bonds and CDs. The result is a growing disparity between the haves and the have-nots, which in the long run is not healthy for any society.

If you have been an investor in real estate or equities, congratulations! However, remember the adage: “What goes up must come down.” Neither housing nor stock prices keep rising forever. The higher the price, the more difficult it becomes to achieve the same level of growth as when it was lower. Although other types of investments may have lagged this year, they will inevitably have their day in the sun. As I always say, proper investment diversification is the key to risk-managed growth.

If you’re the type who loves poring through hundreds of pages of data, here’s the report: http://www.federalreserve.gov/releases/z1/current/z1.pdf

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