Prior to the subprime housing crisis in 2008, the conventional wisdom was to build wealth, you need to buy a house in a good neighborhood and pay off the mortgage. The house besides being a good place to live will increase in value and you will have the option to sell it and end up with building wealth for you and your family. The conventional wisdom applied to a great number of people because before the 2008 crisis, very few mortgage bonds failed which meant people paid off their mortgages and house prices increased. In 2008, the values of house fell, people were left with mortgages greater than the value of the home and many walked away. Financially it was the correct decision, but it caused a lot of pain for families.
Since that time, house prices in general have increased, but income did not keep up and people started to fall behind in having the ability to save for the downpayment. As housing prices increased the dream has gotten further behind. When the mortgage crisis happened, the banks tightened the ability to make a loan, which compounded the problem to buy a house. Then hedge funds began to buy blocks of houses, to hold till the cycle allowed for prices to increase. There are many factors are play and it seemed housing prices were getting further away from the next generations.
In an article by Sophia June of the New York Times News Service, Gen Z is turning to a different way to build wealth. Invest in the stock market, every year it is easier to do this. It is one of the reasons why many generations did not start. Prior to non fixed rate commissions, it was difficult to invest for the small investor – it was difficult to open an account, hold your securities, pay commissions on trading, because the market was orientated to the wealthy.
Nowdays, it is easy to open an account, pay 0 for commissions, buy index funds or whatever stock you wish to buy including buying fractional shares. The reality is if you invest consistently and try to buy more quality companies than bad ones, overtime the value of your portfolio will increase. One of the reasons why index funds work overtime is they are rebalanced every 6 months or the underperformers are changed for the ones that performing better. If you own individual stocks, selling underperformers is harder than you expect. To sell underperformers you have to say you made a mistake and the company is not coming back for a long time. You bought it for a reason or reasons, why are those reasons not good any more? Index funds just do it, because they are mandated to.
Roberta Katz, a Stanford University scholar who has done extensive research on Gen Z including writing the book Gen Z, Explained The Art of Living in a Digital Age said the Gen Z is a generation marked by uncertainty and malleability.
For boomers, there was a sense that you have your home, that you build your wealth, that you could build an estate. For Gen Z, they did not have a sense of that. One of the things our study found was a very high value on flexibility because there was a belief that the world they were going to know was a world of change.
A Gallup study in August found that 81% of Gen Z adults seek personal finance guidance with 75% finding information online.
One of the people in the article uses the Charles Schwab app to invest index funds and monitors his progress using the net-worth tracker in an app called My Wallet, which shows a graph charting the growth of his wealth.
Linking to dividend paying stocks, in our instant society, the reality is for most people building wealth takes time and the sooner you start the sooner the compounding effect can take place. Investing regularly, reinvesting your dividends and ensuring the companies you invest in make profits allows wealth to build. Once you reach a magic number, you really see the benefits and then what you do with your wealth allows you to have many more options.
There are more questions than answers, till the next time – to raising questions.
