The Only Way You'll Ever Catch Up to the 1%

Source: TaxCredits.net via Flickr.

Good news, America: We have more money as a whole than we had at the end of the first quarter!

According to the Federal Reserve, household wealth jumped 1.7% in the second quarter to an all-time record of $81.5 trillion, with stock and mutual-fund portfolios gaining about $1 trillion and rising home values adding another $230 billion. For some context to show how far we've come since the Great Recession, total household net worth dipped as low as $55.6 trillion in the first quarter of 2009.

However, for many Americans, that's where the cheering stops and the reality of the socioeconomic divide between America's richest people and the middle class sets in.

Based on data from USA Today that referenced reports from the Federal Reserve, median household income has actually dropped 2% since 2010. Yet average net worth was basically unchanged at $534,600 as of the end of 2013 thanks to substantial stock market gains, which have primarily benefited affluent individuals. In fact, USA Today points out that just 10% of all U.S. households own roughly 80% of stocks, making the middle class reliant on home equity appreciation for a good portion of their net worth gains. This is the reason why the average net worth of the top 10% of households was $3.3 million, while median household net worth was a proverbial mile away at just $81,200 as of the end of 2013.

Do this or you'll never catch up to the 1%
As this income rift widens, the implication grows that middle-income and even lower-income individuals are cheating themselves out of their chance to bridge the gap between affluent individuals and themselves by not doing the one thing that could narrow this gap: investing in the stock market.

Of course, it should be noted that the stock market isn't without risk. Volatility is common in stocks: The Dow Jones Industrial Average, perhaps the most storied American stock index, has fallen more than 20% on nine separate occasions since 1960. However, holding stocks over the long term has been shown to be one of the most prolific wealth-creators for investors.

Why not focus on a shorter time period, you ask? Because investing in the stock market isn't about buying a ticker symbol. Rather, it's about investing in quality businesses that have the ability to effect social and economic change over time.

Source: Apple.

A perfect example would be technology giant Apple (AAPL -1.22%), which has been changing the way consumers interact with one another both within the workplace and outside it for more than a decade. From smartphones to the introduction of wearable devices, Apple remains on the cutting edge of efficiency and utility. Over the past 30 years, Apple shares are up in excess of 24,000%!

Why stocks take the crown
Perusing the field of potential investments will turn up a wide range of opportunities. You can buy bonds, metals such as gold, or even hard assets like a home in order to grow your nest egg. Yet, over time, only stocks have delivered substantial investment returns that people can count on for their retirement.

Utilizing the Securities and Exchange Commissions' compound interest calculator to simulate historic investment gains over time, I created the following scenario to simulate the returns of my fictitious middle-class investor over a 40-year period.

Assume that this investor:

• Began with $10,000 in principal at age 25.
• Added $100 per month over the course of 40 years.

Now let's have a look at where this middle-class investor would be sitting at age 65 if he purchased stocks, bonds, or gold with his money.

Graph by author. Data based on historical returns of each asset class and calculated using a compound interest calculator found on Investor.gov.

As you can see from the statistics above, that initial $10,000 investment plus $100 per month added would be worth nearly $720,000 by age 65 if our fictitious investor purchased stock -- and this model didn't even include the possibility of receiving and reinvesting dividends, which could further allow compounded gains to work their magic over time. Historically, the stock market has averaged a return of nearly 10% over time, so to be conservative, the aforementioned dollar figure was reached using an average annual gain of 9%.

Bonds appear to fare pretty well too, gaining about 5% on average and providing a fairly safe return on investment. However, with a nest egg of just $215,000, our middle-class citizen is unlikely to have enough to retire comfortably. Furthermore, with inflation averaging in excess of 3% over the past 100 years, they're liable to see their gains seriously watered down.

Gold actually delivers the least impressive returns (less than $74,000) of all, because physical metals offer no dividend, and the historical return on gold over the past 100 years is a paltry 1%. With inflation factored in, our middle-class investor would actually lose money on a real basis despite making money on a nominal basis.

And just to cover all our bases, investing in a home produced equally depressing results. Despite abnormally rapid home-price appreciation between 1997 and 2007, home prices were essentially unchanged on an inflation-adjusted basis between 1890 and 1990, gaining just 0.21% according to data found in Robert Shiller's Irrational Exuberance. In other words, your primary home is a place to live and shouldn't be thought of as an investment.

Source: Flickr user Celestine Chua.

Getting started is easier than you think
For some Americans, the biggest obstacle isn't recognizing that stocks are their best chance of getting ahead; it's actually taking the first step toward their financial future.

Perhaps 20 years ago there were some valid excuses not to invest in the stock market, given that investment information was somewhat difficult to come by and stock trades had to be executed by a broker or other financial professional. But nowadays, there are a number of brokerages that offer inexpensive trade commissions (sometimes below $10) and allow users to get started with small minimum balances. ShareBuilder, for example, advertises that users can get started with no account minimum and can set up an automatic investment plan that buys preselected stocks once a month for an account holder.

In addition to individual companies, all investors can also take advantage of hundreds of different mutual funds and ETFs that allow consumers to spread their risk and money across a basket of stocks.

Of course, if you need some trustworthy experts in your corner, you can always trust David and Tom Gardner, co-founders of The Motley Fool, to help guide your investing decisions. Their flagship stock picking service, Stock Advisor, has outperformed the benchmark S&P 500 by roughly 100 percentage points since its inception in March 2002. That's the power of thinking long-term and selecting high-quality businesses poised to effect change.