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Author: imdajunkman Three stars, 500 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35339  
Subject: Re: The Net Worth of American Households Date: 1/7/2007 6:26 PM
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Mac,

$10k is petty cash, not a portfolio.

Moving up the scale to the SEC-required $25k for a PDT account, it would take a very superior trader to make serious money from such tiny assets. In fact, a superior trader wouldn't even attempt it.

At $100k --the typical minimum for managed money-- proper diversification. can be achieved by even an average investor, but probably not a livable income. (Calculate the rate of return that $100k would have to achieve in order to produce, after taxes, even a modest $25k/year.)

At $250k under management, a net income of $25k becomes feasible, provided that investments with stock-like risks and returns are selected. But there's no way someone who traffics heavily in CD's and TIPS is going to pull down a net, annual $25k on that small of an account. .

At $500k of financial assets under management, you're now talking feasibility with even a conservative, “balanced” fund approach. At net-7% gain, the annual income is $35k, which is a modest, middling income that many people would consider quite adequate. Combine that income stream with a modest pension and some Social Security payments, and the investor has achieved a fairly robust financial structure that could sustain a lot of damage and still meet most foreseeable needs.

The tradeoff between assets under management and desired return is this: the smaller the account size, the greater the management burden, all other things being equal. The greater the account size, the lesser the threat that when bad things happen –-either a large event or many small events-- cannot be recovered from. Size matters. The more money that is being managed, the easier it becomes to reduce risk.

“To get from $10,000 to $1 million is all but impossible. To get from $1 million to $10 million is all but inevitable.”

Net worth is not true wealth. Henry David Thoreau was one of the richest men this coutry has ever known, even though, as he says of himself, "He ate many a supper in another man's house." But net worth can be one sort of insurance policy against financial hardship. Not the best one, but one of the ones which are available. With nearly 50% of this country's households having a net worth under $100k, we are living in the land of the under-insured, which was my point. The net worth numbers are worrisome, given the escalating war debts, which will be coming due.

Charlie
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