Tangible assets have been a key component of wealth building for most of recorded human history. In fact, before the advent of the Industrial Revolution in the 18th century almost all assets were in the form of real estate, precious metals, livestock or other physical property and goods. Even today physical assets constitute a large proportion of the net worth of many households. A house is perhaps the premiere example of this phenomenon. Owning a house is considered the bedrock of middle class status in most developed countries.
But tangible wealth building strategies in the modern age have run afoul of adverse global economic trends. In decades past, there used to be a generational escalator of sorts in tangible assets – an accumulation process that middle class people naturally progressed through as they aged. This traditionally started as soon as a person became a young adult and continued right up until retirement age.
Formerly, parents or other relatives would buy recent high school or college graduates useful items like fine wristwatches, stately fountain pen and pencil sets or jewelry like cuff links for men or earrings or a necklace for women. These heirloom quality items were often what I refer to as functional luxuries. This means they would not only perform a needed task, but would also retain or appreciate in value over time.
The next stage in the traditional tangible wealth building escalator was marriage. In addition to the bride and groom exchanging an engagement ring and wedding bands, wedding guests would happily bestow wedding gifts. While small appliances and kitchen utensils were common, it also wasn’t unusual for paintings, sterling silverware or objet d’art to be gifted. These tangible assets were not only thoughtful décor for the newlywed’s home, but would also boost the net worth of the new couple.
The next phase of physical wealth accumulation for most young people would come in the form of a house. And even if not immediately affordable, most young adults would live in a cheaper apartment until they had saved enough for a down-payment. A house often was – and remains – the single largest purchase a person makes, representing an important step in the generational wealth building process.
Inheritance is another element of the tangible wealth building tradition scattered throughout peoples’ lifetime. When we are younger, grandparents, great aunts and great uncles pass away. As we reach middle age and older, our parents and their siblings pass away.
As sad and trying as these events may be, the tangible inheritance from them are sometimes substantial. Aunt Greta can’t take her prized diamond ring with her to the afterlife. And Uncle Phil’s carefully stashed collection of old gold coins needs to go to someone. Even grandpa’s early American maple slant front desk must find a new home when the time comes. Regardless of who leaves what to whom, inheritance is a key way that tangible wealth is transmitted across generations.
When the generational wealth building escalator functioned properly, middle class families approaching retirement age possessed significant amounts of wealth in the form of physical goods accumulated over a lifetime. These tangible assets conferred a multitude of benefits on their owners.
For example, a house provides substantial protection against future inflation by inoculating the homeowner against rental increases. Fine art and antiques not only have decorative value, but also tend to appreciate in real terms over long periods of time. And because functional luxuries are rarely thought of as assets, it removes the temptation that some people might have to sell them for “quick cash”. In effect, physical wealth acts as a discreet piggy bank, helping to buffer the middle class from the ravages of inflation, banking crises and financial bubbles.
Unfortunately, this traditional method of building wealth has been unraveling for decades in the Western world. Fewer and fewer young adults receive tangible graduation gifts of significant value due to changing fashions coupled with the broad decline of the middle class. The number and quality of wedding gifts has experienced a similar erosion. Many times, newlyweds simply request money or gift cards, which are immediately spent on the necessities of living in a very expensive world.
Reckless economic policies instituted by the world’s central banks have also contributed to the breakdown of the traditional wealth building escalator. The de facto pursuit of housing bubbles by the financial authorities has been particularly damaging to young people looking to buy their first home. Even modest condos in desirable urban areas can easily exceed half a million dollars or more – a sum far outside of the price range of most 20 somethings.
Young people who do manage to scrape together the outrageously large six-figure down payments often find themselves house poor. They are crippled by massive mortgages that require dual-income professional salaries to service. And even a temporary job loss – a stunningly regular occurrence in the modern economic landscape – can easily lead to a devastating foreclosure.
Perhaps most worrisome is the tremendous decline in the quality of consumer goods over the past 40 years or so. Decades ago, the gift of a mechanical watch, high-end fountain pen or fine jewelry could – after a short period of initial depreciation – be expected to appreciate in value over time. But, starting in the 1970s and accelerating into the 1980s and 1990s, consumer goods gradually became cheaply made and disposable.
Today, few of the consumer goods sold qualify as functional luxuries – they are simple not built to a high enough standard. As a result, most consumer goods that people now buy rapidly depreciate, failing to provide a reliable store of wealth. Long gone are the days when you could expect your personal purchases to last a lifetime and still be worth something.
All of these economic forces have converged to hobble the tangible wealth building process that used to underpin the middle class. In fact, the transmission of accumulated generational wealth in tangible form is one major reason the middle class tended to remain stable. Now that this mechanism for wealth preservation has largely broken down, I fear what the future holds for many people. This is why I firmly believe it is more important than ever to augment your traditional stock and bond investments with tangible assets.
