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*If you missed Part 1 of this Picketty Project check it out here.*

To the six of you that got through Monday’s post, congratulations!  Now for the stuff most of you actually want to learn about.  (Who cares about the 1% – what can I do to make sure I don’t end up as a used-to-be-middle-class person?!)

To put things bluntly, if you screwed up the birth lottery and don’t have rich parents, then screwed up the marriage lottery and didn’t marry rich, then you’re at a substantial disadvantage if you want to rapidly increase your net worth.  You can argue against this all you want, but the facts are pretty straightforward.

That being said, while the path to the upper part of the middle class might have gotten narrower and harder to navigate over the past few decades, there is still a trail to follow.

If You Can’t Beat ‘em Join ‘em

Who Is Thomas Picketty & What You Can Do To Avoid Becoming a Bad Inequality StatisticWe know the game is slanted.  We know that those who own stuff are going to see bigger cheques than those that work for cash going forward.  So the easiest way to get ahead is simply to align your interests with the rich and super rich.  The best way to do that is buying stocks – ASAP.  We’ll let you in on how we choose to get exposure to stocks here, but the key thing is to become an owner of businesses (that’s what a stock is for those of you that are a little new to this stuff) as soon as life lets you.  If that means cutting out a few luxuries or living in a slightly smaller house, you’ll make those sacrifices if you want to get cash flow from investments as opposed to only your job.

Don’t Do the Taxman Any Favours

Over the past few decades in Canada, and especially in the USA, new laws have consistently been created that shield investment income – dividends and capital gains – from taxation.  There are all kinds of black hole debates we can waste our time on when it comes to simplifying the tax code and other stuff most people really don’t understand (which is 99% of the problem), but at the end of the day every time some maverick politician tries to change these taxes to make it less profitable to get money from investing instead of actually working or owning a business, they get bombarded by incredible amounts of negative media driven by the huge dollars that have a massive interest in keeping things the way they are.  It’s hard to win elections without financial backing these days and more and more of the people with the resources to give financial backing appreciate how investment income is currently treated.  It’s tough sledding trying to change that, so instead, use it to your advantage.

Check out my article about new TFSA limits for more information on how a person who is thinking about becoming “rich-ish” should really prioritize TFSA contributions.

Diversify Your Income

The rich and upper middle class (however we separate the two these days) usually don’t depend on their jobs as their sole source income.  In today’s world of outsourcing and freelancing, very few jobs are safe and the 30-year career with one company is quickly being relegated to the history textbooks.  The more sources of cash flow you can snag the better you are prepared for the loss of any single one.  Starting a side gig, investing, renting your basement suite, or working a part-time job are still legitimate ways to get ahead and keep yourself out of crisis mode if you lose your main source of income.

Become Educated

I’m going to briefly slip into teacher mode here for a little while and say that becoming educated is a real hedge against getting run over by the new economy.  I don’t mean finishing high-school – although that is fast-becoming a necessity – or getting a Bachelor of Arts degree, I mean becoming curious about the world.  Spend an hour reading before casting a vote every four years, and/or glance at a newspaper every once in a while – they come right to your phone!  Understand how various tax proposals work or how governments are spending your tax dollars so that you can make an educated choice in an elected representative.  Regardless of your political affiliation, only viewing media generated by people who think exactly like you do and dismissing everything else as a product of the “elitist loony left” or the “dumb greedy uninformed right” is a sure way to become the person no one wants to talk to at a dinner party and the person who others know isn’t nearly as educated as they think they are.

Related: TFSA vs RRSP: Head to Head Comparison

Ok I’ll get off my soapbox now

If you don’t feel like doing a little light reading (aka 700+ pages of economic theory and taxation charts) check out the podcast or Youtube video we did on the topic at the Money Mastermind Show.

Despite the trendy talk about inequality we still don’t have it nearly as rough as pretty much any of our forefathers did before 1940 or so.  There are still plenty of ways to climb up the social mobility ladder – but let’s make no mistake, that ladder is getting harder to climb all the time.

Article comments

SST says:

I’ll attempt to keep my answers as they relate to Picketty’s work.

re: Stocks vs. Alternative Assets
“the stock market has had such strong returns for 200+ years relative to those alternative assets.”
I would be wary about believing those 200-year stock market stats without some of your own research behind the numbers and methods. As well, I’m pretty sure land, gold, production, resources etc. have been around much longer than 200+ years, thus making stocks the alternative asset. 😉

(As a side note, since gold was released from government price controls in 1971, the return of stocks above diametrically opposed gold has been only 2% per year. I would not claim 2% to be “such strong returns”.)

Also keep in mind that the “fundamentals” which have driven the stock markets of the last ~35 years have been debt and ever-lower interest rates — not GDP growth or any other positive factor — which is directly related to the rise in wealth vs. labour. When credit can no longer be generated and interest rates start to rise, what will the market returns be?

I too mentioned the role of government and big-money and in staving off the inevitable maths. Both are great at producing market distortions which can last for years. I think some form of public equity coat-tail riding would benefit a portfolio, but definitely not a 100% all-in approach.

in terms of when the debt-bubble cracks and the need to own ‘hard’ assets, I wouldn’t put precious metals on the list (even though I’ve made money from them) as they are too bound to financial instruments. I would assume ALL asset prices will be depressed but the show must go on thus the need for production assets, to be more precise. Rental assets, farmland, energy production, and the like.

re: Stock Ownership
The NYSE did a survey a few years ago which found that 70% of people who owned stocks did not know in what name the stock was registered, so you are not alone.

The term is “street name” and is as follows:
“Under the street name system, a depository [broker or bank] is the actual shareholder of record, meaning that it is the official owner of the corporate shares, even though it is not the individual or institution that is the underlying owner of the shares. Under this system, the underlying owner is called the “beneficial owner.” The beneficial owner enjoys the benefits of the shares, such as the receipt of dividends and the right to vote on important corporate matters, but does not hold legal title to the shares. More than 75% of all public company shares are held in “street name”. ”

And if you buy an index or mutual fund, ETF, any kind of basket asset, you quite literally claim ownership to nothing.

The reason behind this is speed and ease of transaction. It also allows depositories to short sell. You can, just like the olden days, apply for a physical certificate which will give you full legal ownership of your stock. You can also register ownership directly with the company. Both good ideas if you are holding for the long term. I have certificates for all my private equity investments. Of my public shares, one is more or less a holding company thus not worth registering; the other is not a long-term play.

In terms of ownership of public companies, “ownership” constitutes holding anywhere from 10-50% of outstanding shares. Thus the vast majority of public companies are either i) not under the direction of ownership (the CEO is in control; Picketty’s ‘super-manager’), or ii) owned and directed. Either way, your vote in no way constitute ownership.

(As previously mentioned, Barclays owns the most corporate shares in the world; they are not the richest company but they wield the most control. Something to think about.)

A great book and eye opener is Citizens DisUnited by the highly respected and deeply experienced Robert Monks.

re: Picketty-esque Investments
I would avoid growth-dependent industries such as lumber companies. As you mentioned in your reply, growth may be low for extended periods. But the world will still require products such as oil and food just to keep operating. Also keep in mind that certain crops (and industries) in North America are heavily subsidized with government funds, so these may suffer. I would (and am) also investigate investment in Asia — India, China, Philippines, Vietnam, Myanmar, etc. — and Africa where there is monstrous resource wealth yet to be developed. Very bumpy roads without a doubt, and at this point much safer to pursue through proxy than directly (eg. Coke started operations in Myanmar last year so perhaps buy some shares of KO — in your name).

Every nation has its problems and benefits so you need to have the ability to develop a big picture and long view of that landscape. You can seek investment in oil exporting countries, as they will experience growth; or you could seek investment in oil importing countries NOW to position your assets for sale to wealthy exporting counties LATER. Picketty’s time-frame extends over the next 80+ years, so plenty of time to pursue well thought-out moves.

In my opinion, this is how Capital should be used, for stimulating conversation and ideas about what is to come and how to best benefit.

re: Personal Inquiry
Being that you are both dual citizens…first off, you should have no problems becoming millionaires if you are able to fully access all that America has to offer. And if you haven’t already, get in on that action!
Other than that, I am invested in Canadian farmland and have done exceptionally well over the last 5+ years. If the land is of high arable quality you might want to keep it and rent (typically 5-10% of land value). It can lend a solid degree of efficiency to your portfolio. Don’t ignore your own advice laid out in this article — Diversify Your Income.

Sell half? What are the tax implication on both sides of the border? Remember, according to Picketty, this is a long game so you have to be honest with yourself if you want to take on that ownership responsibility. Above all, it’s a nice problem to have, take your time.

Kyle says:

Thanks for the detailed response SST.

Re: Stocks & Alternative Assets

You certainly raise an interesting point about perspective on what the true

Diversifying and educating yourself are important, no matter what the circumstances. When it comes to protecting yourself financially, learning more is always helpful. Diversifying allows you to prevent plummeting into oblivion over one mistake! Great post, thanks!

SST says:

“So the easiest way to get ahead is simply to align your interests with the rich and super rich. The best way to do that is buying stocks

Kyle says:

Love this comment SST, I promise to reply more in-depth over the next couple days. Just running a little short on time to organize my response.

Kyle says:

So, finally got around to responding to this comment SST.
I feel like we