“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
—Warren Buffet
Warren Buffet, one of America’s most successful investors, has often touted the power of compound interest and the financial evidence proves he is right. Because the U.S. stock market has returned about 11% per year on average over the last century, while bonds have averaged about 5% and homes around 4%, those who own U.S. stocks for decades inevitably grow richer than those who do not.2 For example, Figure 1 illustrates how a $10,000 investment performed over the last 40 years, and one can see that while stocks returned almost twice as much as bonds by annual rate of return (11.0% vs. 6.1%), compound interest produced nearly 7 times more dollars for stocks than for bonds ($670,120 vs. $108,023).1 In other words, over time compound interest converts unequal rates of return into even more unequal quantities of dollars.
This mathematical fact drives inequality because of unequal ownership of the U.S. stock market. Only the wealthiest 10% of Americans are able to invest much in stocks, while the middle class (50–89th percentile) invests mostly in homes, which return even less than bonds. The bottom half of Americans invest in nothing and have never accumulated wealth in any era, even when our tax code was more progressive in the past.4 For example, while the bottom 50% of households owned an average of $11,000 in stocks in 2019, the top 10% owned an average of $1.7 million.5 Thus, because the rich own large quantities of stocks and are able to hold onto these investments for long periods, compound interest makes them grow ever richer than everyone else—and then their children inherit this wealth, invest in stocks, and repeat the cycle.6
Now that we have demonstrated the self-evident truth that wealth comes from owning the U.S. stock market, the next question to ask is who owns it?