The Definition of Rich: How an SEC Ruling Has Changed What It Means to be “Rich”
by Alexander Green, Chairman, Investment U
Thursday, June 7, 2007: Issue #681
Are you rich? The definition of rich in the Oxford American Dictionary is “having a great deal of money or wealth.” But then, how much is a great deal?
Most Americans probably define rich as “someone who has a lot more money than me.” (That’s why taxing the rich is so popular politically. By definition, it leaves the vast majority of us out. “Don’t tax you and don’t tax me. Tax that fellow behind the tree.”)
Fortunately, the Securities and Exchange Commission has recently redefined what it means to be “rich.”
Why? Because the SEC restricts hedge fund ownership and other “private money” investments to the wealthy, whom they assume can take care of themselves.
This requires the regulatory body to define – and redefine – what it means to be “rich.” This year the SEC made a new ruling.
According to The Wall Street Journal, “The SEC now says investors need to have investible assets of at least $2.5 million, excluding equity in any homes or business, to be eligible to sign on a hedge fund’s dotted line. That’s a huge jump from the current requirement, which says individuals have to have a net worth of at least $1 million, including the value of primary residences, or an annual income of $200,000 for the previous two years for individuals or $300,000 for couples.”
Forget keeping up with the Joneses. Now you have to keep up with the SEC.
A Million’s Not Enough To Be Considered Rich
Clearly, the federal government believes that, if you really want to consider yourself wealthy and sophisticated, having a million dollars just doesn’t cut it anymore. In its defense, the SEC says it’s just trying to keep up with inflation and booming asset prices.
And there is no doubt that total wealth has been soaring in the U.S.
According to the Federal Reserve Surveys of Consumer Finance, 8% of total households in the U.S. have a net worth of $1 million or more, if you include home equity.
Unfortunately, the new definition of rich – a net worth of $2.5 million (excluding home and business equity) – applies to just 1% of the American population.
This has had the predictable effect of outraging many investors who are now shut out from hedge funds and other private investments.
I agree with them, frankly. Uncle Sam doesn’t have any legitimate business telling you which risks you can take and which ones you can’t. (As though money equates to intelligence or, worse, government bureaucrats and politicians knowing better than you do what’s good for you.)
If you have enough money to meet a fund’s investment minimum, you should be free to have a go at it. This is a risk-taking culture after all. Good risks often lead to large rewards. And those who use their freedom to take poor risks, well they learn soon enough.
But back to my original question. Are you truly rich?
Rich Is a Relative Concept
According to the latest statistics from the U.S. government, to be in the top 1% of U.S. households requires a net worth of $6 million. The minimum income required to be in the top 1% of American tax-filers is $300,000.
Don’t feel bad if you didn’t make the cut. As Henry David Thoreau once said, “A man is rich in proportion to the number of things which he can afford to let alone.” For many of the wiser among us, amassing a large sum of money is one of those things.
Besides rich is such a relative concept.
A few months ago I was listening to an interview with Bono, the singer for the rock band U2. (Bono has devoted a great deal of time and effort to relieving the plight of the poor in the Third World, a job that has won him accolades worldwide, as well as Time magazine’s 2005 award for “Man of the Year.”)
The interviewer asked Bono whether, with his astonishing wealth, the poor he was helping could in any way identify with his lifestyle.
“You have to understand,” Bono replied to the journalist, “that in these people’s eyes there is no difference between you and me.”
“You haven’t seen my salary,” the interviewer responded with a laugh.
“It doesn’t matter,” said Bono. “You have a roof over your head. Three squares a day. Clean drinking water. A doctor who sees you when you’re sick. In the eyes of these people, you have everything.”
Indeed. You may not qualify for hedge fund ownership. You may not have a six-figure income or a seven-figure net worth. But then you may still be exceedingly wealthy.
Good Investing,
Alex
Related Investment U Articles:
- Building Wealth: The First Step Toward Gaining Your Financial Independence
- How to Become Financially Independent in Seven Years Or Less
- Are the Rich Smarter Than You?
- Buying Tax-Free Bonds: Why You Need These Fixed-Income Investments Now
- Hatteras Financial: A “Goldilocks” Situation Creates A Safe 17% Dividend
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Alexander Green is the Chief Investment Strategist of Investment U. A Wall Street veteran, he has more than 20 years of experience as a research analyst, investment advisor, financial writer and portfolio manager.
