Why isn't everybody rich?

Passive investment can get you into a good footing but cannot make anyone really rich. In stock market, long term investments in funds would beat the inflation and give some real growth that can be utilized in other way (like a retirement income).

Now to actually be rich from stock market, you need an active investment strategy either value based or trading based; that most people cannot pull-off. In fact bulk of the dedicated day traders are no better-off than a regular person holding a regular job in terms of finances.

It is possible however, to invest in mutual funds, which are managed, and get a inflation adjusted return over a longer period. Now why does every one does not do it, well first a lot of people probably do not have the capital required to invest which will actually amount to something significant; if you can only invest 20 per month in a mutual fund, event after 30 years it may not amount to much. Second, many people find investment in stocks or equity based mutual funds inherently risky (the volatility), that has to do with their risk appetite, inherent outlook of stock market or simple lack of financial literacy. Third, there are people who believe on less volatile traditional instruments like bank deposits and bonds.

Investment finally comes down to what you inherently believe about an instrument, some believe in stock market, some in fixed income, some in commodity (gold, oil etc.) and some in real estate.

1. 1,000 percent of nothing ... is nothing. The usual advertising b.s. about "long-term gains" doesn't get anyone rich. If you start with a >big< amount of money, you'll end up "rich". If you start with peanuts you'll end up with "10 times as many peanuts."

2. Inflation takes away most of it. The usual advertising b.s. about "long-term gains" doesn't get anyone rich because of inflation.

3. Humans don't live that long. Getting rich in 50 years is completely pointless - you'll be dead.

The usual advertising b.s. about "long-term gains" is just advertising b.s.

It all comes down to 2 things:

• Financial illiteracy
• Insufficient initial capital

For the first point, a very low number of people even possess basic knowledge of finance. If you don't know any better and learning basic economic concepts is disregarded throughout your upbringing (be it in education or parenting), then it's highly unlikely for you to eventually find interest in them. Add on top of this the ongoing culture of instant gratification, glamour and overspending and you have a recipe for disaster. Few people will get to think that by postponing indulgence and through being prudent they can secure their future mid to long term.

For the latter, if you're too occupied making ends meet and surviving, chances are you won't have the time or capital for any meaningful investment of any sort. When 14% of the population of the USA or alternatively 1/2 of the total Earth's population lives in poverty, this becomes even more apparent.

Because you have to be rich to get rich!

Let's set up a model calculation.

(don´t get hung up on these numbers - do your own calculations with your own goals and premises!)

• I define be rich as owning $1 million
• Average return on your funds 7%

Say from age 0-10 you get some money from your family, because you are lucky, and your parents put it an an index fund instead of a savings account. Let´s assume they are well off and you get $100 per month. (I guess you are in the top 5% even in America.)

After your early childhood you have: $17,208.59

Now you start mowing the neighbor's lawn once a week, getting an additional $100 a month. You save everything.

When you are 15 you have $38,460.75

Now you start working after school. Let´s say you make $600/month and your family, recognizing your enthusiasm, ups your savings to $200/month. Still you live on your parents' money.

When you are through with high school at 18, you have now $79,149.34

For the sake of simplicity, let´s say you get an incredibly good offer to start directly in your uncle's business, whose favorite nephew you are, and get offered a position without even going to college. Your Salary is $80k and you are able to save full half of it, eg $3.3k per month.

You are a millionaire at 31!

Even with this incredible luck you needed to contribute $567.600 out of your own pockets to make up the rest in interest.

Anything on that vita that seems unreasonable to you? Most can´t afford to put away even a fraction of that until out of college and then, they probably have to pay back student loans first.

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OTOH: What would happen if we all got enough funds to retire at age 30-40? We would stop making things, so things would get more scarce - which would increase prices. So our returns would no longer cover the costs of living, so we´d have to start working again ...

I'll answer your question exactly as you asked it:

If it is so easy (basically invest as heavily as you can in your youth to be rich into middle age and older), why doesn't everyone do this? There would be no need for pensions or any other savings or financial security that way, why even bother investing in assets like property that you have to manage when you can just have an index fund work for you?

I'm assuming that you're asking why isn't everyone rich from investing in index funds, since index funds always go up in the long run (from your question).

1. Index funds differ for markets. If you're US-based, you have some index funds that are standard, like the S&P 500. If you're Japanese, you have the Nikkei index. If you're Chinese, you have the Shanghai. Each of those have had good periods and bad periods, some lasting long some lasting short. It's easy to say "buy and hold" for everyone, but it's hard to do as events happen in those individual markets. It's very easy to become distracted. This is true for all cultures.

2. Very few people invest, much less save. Many people in the US don't have anything saved for a major emergency, so where would they get the money to invest? The Chinese do save a lot, but saving 20%+ of income is pretty rare across cultures, especially in some of the countries in the west.

3. Sacrifice seems easy until we do it and we have to buy index funds with something we've earned or have and are willing to sacrifice for the future. If saving money was so easy, why didn't we save 50% of our income we made before turning 18 'cuz most of us lived with our parents and didn't really have a lot of needs in those days? We always found reasons to spend! We also don't always feel we'll be there in the future, so spending now makes more sense.

4. Stories on TV and in movies show us that rich people constantly spend, hang out with their friends, and commit adultery. You can laugh at this, but it's rare to see a TV show where rich people save money and talk about consistently buying index funds. I do remember a Big Bang episode where Sheldon talks about saving money, but it was a very rare moment on TV. Most TV is people spending money incompatible with their income. You can search the internet for people who do this type of analysis (Friends, Sex and the City, etc), but the take-away is that many of these TV shows portray a lifestyle that wouldn't be possible on the character's income and we seldom see the character working! That's what many people compare their life too - it's not real. The Millionaire Next Door is real, but wouldn't make an entertaining movie.

The only way a fund can outpace inflation is by investing in something that gives a better return.

For this to happen, someone will have to make an economically bad decision, because they are forced by circumstances or because they do not have all the information, and lose money as a result.

If everyone were to avoid that by investing in index funds instead, there'd be no other economic activity for the funds to latch onto and extract value from.

Paid employment is also a "bad decision" in this context, as you trade the long-term use of the products of your labor against short-term one-time payments.

So, index funds work because they are only affordable to those who are already wealthy.

The answer is simple: the more people can get, the more they want. Most people today enjoy and expect things that in medieval times would only have been available to the wealthiest elites. The reason such people aren't considered "rich" is that such a term is generally used in a relative sense. No matter what state of material wealth a population achieves, 20% of the people are going to be in the top 20th percentile, and 20% of the people are going to be in the bottom 20th percentile.

As to why not everyone earns money in stocks, there are a couple of factors. Beyond the fact that some people might have more immediate need for money, the marginal value of investment beyond a certain point will generally go down as the amount invested goes up. Thus, the more people want to invest in a company, the less return it will be able to offer, up to the point that prospective investors would have better things to do with their money.

Because “rich” is a result of an uneven distribution of wealth. Last I researched, the total US wealth divided by the total population resulted in $160K/person. $320K/couple is not rich. The median wealth number is far lower than this to offset those with millions, and of course, billions. This is how we get to the articles that mention how the top few families have more total wealth than the bottom 50% combined.

In the end, anyone who can save 15%, keep investing costs low and their own budget reasonable is likely to be able to retire to the lifestyle they’ve grown accustomed to.

My wife and I did just that, 15% plus 5% company match. As we approached the point where 4% of savings was enough to cover our budget, it was time to call it quits. I retired at 50. Nearly all of our retirement account was invested in an S&P index fund.

I'll make it short.

If you want to know why a lot of people don't invest their money, either they

• don't know about investments
• don't have spare funds to invest, or
• would rather spend that spare money than invest it

However I'm not sure how the market would react if 100% of the population started investing in the way that you mentioned.

Also, as a broader question, "Why can't everyone be rich": if everyone has lots of money, then they're all on the same level and essentially no one is rich; that would just be inflation, richness is a relative concept.

Most people have a high discount rate for their own money, meaning that they would rather have $1 now than $2 in five years’ time. Given such a high discount rate, there’s no point in saving, because no investment is likely to have such a high rate of return. They might well be richer in the long term if they used a lower discount rate, but they’re more concerned with the short term.

The non-rich are sensitive to recessions.

If every non-rich person followed your plan, spending would plummet. Plummeting spending causes corporation balance sheets to look bad. They cut spending, which involves mass layoffs. Mass layoffs lead to non-rich having less money to invest and force them to spend their investments.

This causes spending to go up, profits to recover. Meanwhile, the non-rich are now worse off than they were before, and the people who weathered the recession are better off due to recovered stock prices.

Our economy is structured to ensure that there are a large number of people desperate for work. It is true that individuals can pull themselves out of that trap through continuous luck and saving discipline; but the economy will respond to large numbers of people earning too much money, saving too much money, or getting too rich by generating relative poverty; often in the people in question, but sometimes in other people. Almost always the people punished will be the "vulnerable".

There are ways out of this, but they require both a rapid increase in productivity and a way to prevent wealth capture. Buying index funds unlikely to do both of these sufficiently.

Historically you can see these events in the various industrial revolutions of the 18th, 19th, 20th and 21st century. We are in the midst of the information (computing) industrial revolution; global trade flows have lifted billions out of absolute poverty. For mass investment to result in mass wealth, you'd need something as impressive as the microchip and Moore's law to kick off around now and cause yet another exponential boost in human productivity (there are a few candidates).

To add to Leon's answer, you need several things to "get rich" even with the wonders of the stock market in your favour:

• Financial literacy. If you aren't aware of how compound interest works or how you can tack the market, you can't even start to get rich in the first place.
• Starting capital. You don't need much to get started, but you do need something. If your circumstances are so poor that saving $50 a month is not possible, you can't get rich.
• Discipline. This is arguably the biggest hurdle. You need to actually be disciplined enough to save that $50 / month, preferably more. Because of the way exponential growth works, you need to start saving as soon as possible (i.e. right from the first job), which for most people also coincides with the time when they're making comparatively little money. Think back to your first job and your first paycheck, your current one. How much of your paycheck do you save? Let's say the minimum expenses a month is $1000. If your first job paid $1500 / month and you saved $500, and your current job pays $3000 / month and you save $2000, you will get rich. But very few people can do this. It's a basic tenet of economic theory that the more you pay people, the more they will spend.
• Discipline #2. You also need to be disciplined enough to ignore fluctuations in the stock market and keep putting in money even during a crash. Over 10 years, the stock market almost always goes up, but over one year, you can lose 20%, 30%, or even 50% of your money. You have to be disciplined enough to not only not sell, but also keep buying. This is psychologically difficult (see loss aversion).

Finally there are a couple more points that affect even the financially literate. These are comparatively less important, because financially literate people will be able to work around this, but they can interrupt the "getting rich" process.

• One-time spending. The biggest example of this is buying a house. Houses are expensive, so if you decide to buy one you might have to pull some / all money out of the stock market. This interrupts the exponential growth process. Another example is illness. If you or a loved one are unfortunate enough to fall sick during a market crash, all the work you've done for 10+ years could be wiped out.
• Humbleness. This is a bit more subtle. Once people get financially literate they also tend to be confident that they can choose stocks better than the average person (more commonly called "beat the market"). This is doable, but takes a lot of effort that most people are not willing to put in. It's psychologically difficult to just tack the market and therefore accept average returns. Once you do not tack the market, you can potentially start losing money (however usually you will continue to make money, just less than market returns).

First of all, "rich" is not an absolute term, but relative. Compared to people a thousand years ago, we are all fabulously rich - we possess invaluable boons such as modern medicine, electricity, cars, industrial machines, the internet, advanced education, and so on. Actually, even within our time, even the poor people in first world countries are rich compared to people in third world countries, both in terms of the "nice things" they have (like smartphones and tasty food) and in real financial terms (US federal minimum wage is several times higher than median income of many countries for instance). However, most people are not rich in the sense of having more money than others in their community. This is a consequence of statistics - wealth can be distributed in three ways:

• Evenly, which is the egalitarian utopia where everyone is equally wealthy and consequently no one is rich (though they may possibly have very comfortable lives)
• Top heavy, where most people are about equally wealthy, but rich by virtue of being more wealthy than a small minority of horrendously poor people
• Bottom heavy, where a minority is much more wealthy than everyone else

Your question sounds like the first option, or possibly like the second option. It so happens that in our world and in history, we always see the third option. The reasons for this are complex and have literally spawned whole disciplines, so I won't go into them here. But your question also asks some specific things about markets, so I think it's worth examining those in detail, so that rather than saying why everybody isn't rich, we instead look at what's to stop anybody from getting rich.

Of course the vast majority of the population is utterly ignorant about investment and good financial discipline. A lot of people don't even realize they can invest in stocks, they don't know how, they think it's a scam like a casino, they're frightened because they don't understand how it works, they don't have the patience or interest to read up on it, and so on. But knowledge and willingness are not critical factors, because even among experienced investors and traders it's rarely the case that everyone gets rich. The reason is that strategies such as buying the S&P are not such no-brainers, as you would expect TANSTAAFL, and the supposedly guaranteed returns are actually not so guaranteed and imply significant risk.

With any long term investment, you have to keep in mind that safe as the investment may be on paper and indeed in reality, life can always throw a curveball at you. Suppose I had a deal for you: You give me $100k now, in 30 years you can cash out $10 million. For the sake of the argument let's pretend this is for real, I'm backed by the FDIC or whatever, there's no way you won't get your 10 mil in 30 years. But if you cash out at year 29, you only get 100k. Now suppose you buy into this, and then a year later you get a deadly disease that costs $90k to cure. Now maybe you can get a loan, maybe you can use the investment as collateral, maybe you can work something out, but the point is that even a zero risk investment cannot be made without risk, because living by itself carries inherent risk. Things like unexpectedly losing your career, health problems, natural disasters or unexpectedly early retirement you can count under this.

The index also doesn't return so much as to make capital irrelevant. You still need a significant chunk to start, comparable to what it would cost to buy a house. Most people don't have that (millions of Americans don't even have net worth greater than zero). The average is considered to be 7% annual, so if you got a steady 7% every year for 30 years, your money still only goes up about 8-fold. If you started with 10k, you now have 76k (a big chunk of which may go to taxes). Hardly much richer than you were, and maybe you could have found a better use for those 10k in the three decades it took. In reality, the market doesn't even return a steady 7%, so you would get significantly less than 1.07^30 in the end.

In the very long term the index has returned about the same regardless of "timing", but timing does make a difference. You can set yourself back by almost a decade of gains by buying in right at the peak. In fact the peak is exactly when you will feel most confident about investing because the "the market always goes up". Furthermore, the long term upside presupposes actually holding it that long. What if an emergency happens right as you wait out a crash - you will be forced to realize the paper loss. More commonly, every time there is a crash, you will be very tempted to sell and cut your losses. It's not merely a matter of mental discipline either - the past growth in the index does not guarantee future returns and it could stop growing any time. What would it take for you to stop holding the bag and walk away?

Also, something that I think often goes unnoticed is that it is mostly the US indices that look attractive. Few other countries' look as good. Most economies are already less stable than the US's, but also when the US does crash, the other indices tend to crash with it, but rarely recover as vigorously. The point isn't to agonize over which country's index is better, but to recognize that the tremendous performance of the S&P is a reflection of the prosperity of the USA as a country. It's not going up and up "just cause", but because for the three centuries of its existence, the USA has generally been a country blessed with tremendous natural advantages, a very industrious, productive population and a government that stewarded these resources well. This could change any time, and the US (or whatever other stable country you live in) could become like those "other countries". The principal fundamental support of the supposedly guaranteed S&P growth would thus be destroyed, and your investments would be toast - forget gains, you'd be lucky to walk away with your principal. It sounds fantastic, but when your horizon is 20 or 30 years you have to consider these things. History is full of economies that were doing better and better, with everyone wondering where it'll stop, until they did stop. Then nobody wonders anymore. There's a saying on Wall Street - trees don't grow to the moon.

There are also other "safe" strategies like value investing (as famously championed by Warren Buffet) - but if you read Buffet's book for instance you see that it's not just "buy at low PE", you have to do some serious research and analysis to vet the companies you look at. Not everyone can do that. Some companies have low PE, because their business is doomed and the market knows about it. Sometimes a company is overlooked by the market, and the market keeps on overlooking it when it's time to sell your stock and cash out. And so on with every other sure bet strategy, there is never much reward without risk and hard work.

Furthermore, it's worth considering that when you buy an asset, and sell it years later for a profit, where's that money coming from? It's not like you did much work to add value. Somebody must have bought high and sold low. In some sense, the economy is probably not zero-sum and you provide liquidity and so on. You can for instance consult the GDP, which for most countries (including USA) is growing. But the growth is modest, so I'd suggest a large part of your gain is someone's loss. So going back to "why isn't everyone rich?" - because you can't get rich from stocks without someone else (many someone else's, in fact) getting poorer. The economy just doesn't grow that fast.

But all of that said, many people have no fiscal strategy whatsoever. They don't save at all, or keep it all under a mattress or checkings account. These people would certainly benefit from budgeting a savings rate, and (after doing the research and consulting with a financial advisor) investing part of their savings in stocks and/or bonds. And S&P funds are a pretty good option for the former. But it's not a question of getting rich, it's a question of not getting poorer.

Suppose when you were a kid someone told you about something you could do. It would only take five minutes a day and cost only a couple bucks a month, but doing it could save you thousands of dollars and/or shield you from a significant amount of physical pain over the course of your life. Seems easy, right?

And yet, every day untold numbers of people fork over thousands of dollars to dentists, and/or suffer extreme oral pain, because they didn't choose to do that thing, which by the end of this sentence you will have realized is "brush your teeth".

Or what if there was something even easier, because you wouldn't even have to do anything! All you have to do is not do something. Not only will this inaction not cost you anything, it will actually save you anywhere from $5 to $150 a month --- and by not doing this thing, you will likely save additional thousands of dollars over your lifetime, avoid not only physical pain but potentially catastrophic health effects, even including premature death, and by not doing this thing you will be helping the health of others in your household, all for free! Who could refuse?

And yet every day untold numbers of people light up a cigarette, paying money out of their own pocket for the privilege of worsening their health and the health of those around them, and setting themselves up for higher health insurance costs and large medical bills toward the end of their shortened lifespan.

Yes, of course, I am simplifying matters a bit here. (Like probably you do need to spend money to visit a dentist periodically to keep in good dental health, not just spend a couple bucks on toothpaste and toothbrushes.)

But the point is: people do a lot of things that do not make rational sense, sometimes not even to themselves. In some cases this is because we are unable to accurately predict how our future selves will value the things they do or don't have. (For instance, it may not be until you fork over $2,000 for dental work that you realize how much cheaper it would have been to brush your teeth.) In other cases, even if we have a fairly clear understanding of the pros and cons, we may simply be unable to summon the willpower to choose an option with a long-term payoff instead of one with immediate gratification. (There are plenty of smokers who feel terrible every time they buy a pack because they know they're killing themselves, but are unable to break their addiction.)

The same is true in money matters. At the end of the month you find you have $100 left over. Do you buy into the S&P 500, or do you opt for a night on the town? The choices that seem the most attractive to us in the moment are often not those we will wish we had made when all is said and done.

The World has a finite production capacity for goods. While this production capacity can and does grow, this is not going to increase over a period of several decades to be able to provide for the expensive lifestyles of 8 billion millionaires. The way the economy works actually requires there to be quite a few lower income people for every person with a high income. If a millionaire spends money to buy certain goods, then the work done to make those goods will typically involve a lot of low-skilled labor.

Another way to see the fundamental problem here, is to consider a hypothetical world where everyone is a millionaire. Who will then work in agriculture picking apples all day long? Who will clean the toilets in the office? Clearly, it's only possible for everyone to be a millionaire, whether through work or via smart investments, if all low skilled work has been automatized.

The rate at which low skilled work will end up getting atomized doesn't strongly depend on the way people choose to invest their money, there is natural technological development involved here which may be sped up to some degree, but it's not going to be radically changed simply be letting the World's population learn new investments tricks.

The answer is very easy:

If everyone invested in stocks, the stock prices would rise to the level where stock returns would be much less than what they are today. The power of the compound interest, often called the 8th wonder of the world, would drastically reduce.

It's basically a question of supply and demand. If the money supply to stocks somehow increases, the price of stocks (and thus their return) adjusts so that supply and demand are in balance again.

Because most people are foolish, the intelligent ones can enjoy great returns from their stock market investments. Be happy that there are not enough intelligent people for stock returns to go down!

Sometimes (during economic bubbles), lots of people start investing in stocks with usually catastrophic results. The intelligent investor can use this as an opportunity to reduce the exposure to stock market risk and realize past profits.

Because of this simple equation, that for any economy, and in the medium to long term:

goods and services produced == goods and services consumed

Being 'rich' implies consuming a much greater quantity of goods and services than one produces. Consequently in order for some people to do this, others must be poor (and consume much less than they produce).

I'm going to take exception with all the existing answers, which at best can address why a specific individual isn't rich, but can't answer the question "why isn't everbody rich?"

All means of becoming rich inherently depend on only a relatively small number of people doing them successfully. In the case of your specific example (index funds), the money you're making ultimately comes from two sources:

1. Other people making poor investments in the stock market (allowing the index fund to sell for more than a stock should be worth or buy for less than it should be worth).

2. Growth/profits of the companies the index fund is investing in.

And here's the big spoiler: a large part of #2 depends on large numbers of people being poor.

"Rich" is a relevant term, so by default everyone cannot be "rich".

The problem is Capitalism, by definition the rich are at the top of the pyramid (bosses), using those below them (workers) to generate wealth. The wealth is channelled to those nearer the top of the pyramid while those further down gain proportionally less.

So under Capitalism it's not possible for everyone to be rich, we can all be millionaires but in that case that would be normal and "rich" would refer to billionaires etc.

If it is so easy (basically invest as heavily as you can in your youth to be rich into middle age and older), why doesn't everyone do this? There would be no need for pensions or any other savings or financial security that way, why even bother investing in assets like property that you have to manage when you can just have an index fund work for you?

Many great answers already (in particular, pay attention to @Rich's answer about the balance of what's consumed and what's produced), but here are a few more:

• The "in the long run" is an average. An average means that some people will beat it, and some will underperform it. There are a few reasons why the run-of-the-mill investors will always (at least slightly) underperform the long-term average. Note that some parts of of my answer applies to the stock market in general, and some specifically to index funds.

• Some people profit dramatically in the stock market, such as Warren Buffet. These "winners" will skew the average. The remaining "ordinary people" investors must - collectively - earn less than the total average.

• The overall stock market, managed funds, and index funds form a complex system with a lot of feedback. In theory, funds merely invest in stocks, but in practice, funds are overall so large that their demand also influences stock prices.

• Stocks that are part of an index historically will rise as they are added to the index, and drop as they are removed from an index. And in fact, the popularity of index funds is one of the reasons. Index funds must buy newly-added stocks (at the increased price), and must sell dropped stocks (and the deflated price). For the actual index, this is transparent. But for people who buy based on the index, this affects your result.

This is, theoretically, an advantage of managed funds: they are not required to adhere to this timing (but instead depend on the manager's guesswork, which usually isn't no better).

• Insiders cashing out (legally). You see this happening a lot six months after an IPO: stock prices drop substantially when employees and early investors are allowed to sell their shares. It also happens with ordinary companies. This is another example of certain investors being able to achieve high returns that ordinary investors cannot hope to match.

• As an individual investor, you have a limited amount of control over when you invest, and when you withdraw. You may be forced to retire or use your investment right at the bottom of the market. And not everybody has the luxury of contributing to a retirement account every month for 40 years straight. Life just doesn't work that way.

• Competing demands. Many people have to pay off student loans, save for their children's college tuition, take care of ailing parents, and scrape together money for a home down payment. There may simply not be enough available to save in the first place.