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Economic inequality was already one of the pressing issues of our time long before the coronavirus led to what Brookings describes as “the most unequal [recession] in modern U.S. history.”
Nowadays, with the economy reeling, the old adage that “rich get richer” has never been more pronounced, data shows, as the most vulnerable among us have taken the brunt of the pandemic.
COVID-19 aside, this stark divide was already widening at a troubling pace and a study from the International Monetary Fund exposed one major contributing factor: the wealthy invest better.
When it comes to returns, “wealth begets wealth,” IMF economist Davide Malacrino wrote on Monday, pointing to detailed data pulled from 12 years of tax records in Norway, which he says opens a new window into wealth accumulation.
The numbers show that someone in the 75th percentile of wealth distribution investing $1 in 2004 would have yielded a 50% return to $1.50 by the end of 2015. The elite in the top 0.1% would have yielded a return of 140% to $2.40 on that same dollar.
This chart tells the story:
Why is this the case? Conventional wisdom would suggest that those with more money to invest take more risks, thereby leading to outsized returns. But the IMF research shows that the wealthy earn a higher return even with more conservative investments.
“Richer individuals enjoy pure ‘returns to scale’ to their wealth,” Malacrino wrote in a blog post. “Specifically, for given portfolio allocation, individuals who are wealthier are more likely to get higher risk-adjusted returns, possibly because they have access to exclusive investment opportunities or better wealth managers.”
Financial sophistication, financial information and entrepreneurial talent are also important factors, making the the returns to wealth persistent over time. “This research is the first to quantify this mechanism and show that it is likely to matter empirically,” Malacrino added.
Meanwhile, this week got off to a rough start for investors, with the Dow Jones Industrial DJIA, -0.90% off almost 400 points early in Monday’s session. The Nasdaq Composite COMP, -0.05% and S&P 500 SPX, -0.46% were also resoundingly lower.
