This month the Federal Reserve released the Flow of Funds (Z.1) data for the third quarter of 2018. Among the many things contained within the report, the Fed revealed that U.S. household (and non-profit group) net worth rose by $2.1 trillion in Q3 to a total of $109.0 trillion, a 1.9 percent quarter-over-quarter increase and a new all-time high. Compared to this same period last year, total net worth lifted by 8.2 percent in Q3, a slight slowdown from Q2’s 8.4 percent pace of annual growth but still well above the cycle average (6.5 percent).
Last quarter’s gain was in part driven by real estate, which expanded by $0.2 trillion as residential real estate, the biggest asset for many Americans, benefited from home values continuing to appreciate faster than general consumer inflation. A larger driver of last quarter’s above-trend increase in net worth was the $1.2 trillion rise in the value of corporate equities, not surprising considering the benchmark S&P 500 index jumped by 7.2 percent in Q3, the best quarterly gain since 2013. However, with the recent volatility in the stock market, equities may not be able to provide the same quarterly boost to net worth in Q4 that we have become accustom to during the past few years.
Real wealth creation, though, often occurs over a much longer time horizon because investors can therefore benefit from decades of diversified exposure to stocks and capitalize on the resiliency of the market. One of the best ways to participate is through the use of a 401(k) retirement plan, which provides a variety of tax advantages and in many cases can be augmented by an employer’s matching contributions. Moreover, consistent participation in such a plan, combined with dollar-cost averaging and regularly working with a professional financial advisor, can help investors navigate volatile markets and in some cases even turn large drawdowns into opportunities.
Sources: FRBG, Calculated Risk
Post author: Charles Couch