With living standards declining and housing increasingly out of reach, the social divide is growing more entrenched. On the other hand, social mobility, often romanticised as a function of hard work and ambition, is getting harder to achieve. If we dig into the qualitative aspects of social mobility, things quickly become political and there are countless competing narratives and ideologies.

But at the core of social mobility, it is fundamentally a problem of relative compounding. To move up the economic ladder, it is not enough to grow your wealth, but also grow it faster than the class above you for a sustained period. Without relative compounding, social mobility can’t be achieved.

This is easier said than done. The affluent have a structural asset base advantage where the majority of their wealth is professionally managed and invested into productive assets that generate positive returns. In contrast, the middle class could only invest a fraction of their income after expense so the growth is naturally constrained by scale. The socially disadvantaged suffer the most, often left with nothing to invest after meeting basic consumption needs. Unfortunately, inequality is quietly baked into the equation of compounding.

Government is a necessary force to ensure that as the ceiling rises, so does the floor. But it is often dysfunctional. Relying on government alone to enable social mobility is therefore unrealistic. We would have to take control of the input to facilitate the process.

On Returns

While the wealthy enjoy the structural advantage of a large asset base, it is important to understand how they play the game. At a certain point, wealth shifts from accumulation to preservation. Rather than chasing aggressive returns, the wealthy often prioritise capital stability, accepting lower yields in exchange for safety and predictability.

A useful proxy is the classic 60/40 portfolio with 60% in equities and 40% in bonds. In contrast, individuals in earlier stages of wealth building could get higher long term returns by adopting a more aggressive allocation tilted toward growth assets.

Higher risk premium can also be found in business building. Starting a business or joining a high-growth start-up creates exposure to non-linear payoffs that far exceed what passive financial portfolios typically deliver. The equity upside in a growing company carries both financial benefits and personal benefits: your ideas, skills, and execution compound alongside the capital.

Leverage is another tool for supercharging returns but doesn’t come without its danger. In liquid markets like equities and crypto, this leads to ruins faster than anything else. But real estate is an exception due to it having both the advantages of public asset’s liquidity and private asset’s return smoothing.

Consider a typical investment property with:

• 5% capital growth,

• 5% rental yield,

• 5% cost of funding,

• 80% loan-to-value ratio (LVR)

This structure delivers a total return of ~30% per annum on equity in the early years largely due to the effects of leverage. This is not exotic finance but the bread and butter of how real estate creates wealth for the average investor. When we judge or critique property investors as hoarders, we should also acknowledge a difficult truth: for most people, real estate remains the only proven and repeatable path to generational wealth.

On Traps

High returns are only meaningful if there are capitals to deploy. Unfortunately, there are traps that deplete capital before it ever sees a day of growth.

Reckless consumption is one such trap, and no one is immune, not even the affluent. Andrew Wilkinson, founder of Tiny, explores this candidly in his book Never Enough, revealing the surprising financial realities of billionaires. Lavish habits like building an actual boat often end up sinking one’s financial boat. While some justify these as the price of playing the status game, the age-old advice to live below your means remains deeply wise.

Then there is gambling. As Malcolm Turnbull described in his book A Bigger Picture, some wealthy individuals can lose eye-watering sums of money, significant even relative to their wealth, in the blink of an eye.

Another major trap lies in private investments. The quality of private investments varies significantly with some arrangements being borderline criminal. Poor private investments could have a detrimental effect on wealth. We are often told that private investments have lucrative returns relative to the public market. While there are many successful venture capitalists thanks to the generous fees and carry, the reality is far more unforgiving for limited partners (LPs) and angel investors. There are very few outsized successes for LPs and angels relative to the size of the participant pool and the size of risks and inconvenience they bear. David Swensen, the architect of the Yale Model and the pioneer who helped institutionalise private equity investment, had some stark warnings against private investments in his late years.

Even among the most successful private investors, portfolios are often illiquid and DPIs are significantly lower than public stock index returns. I’ve come across individuals who lost millions in private ventures and real estate syndicates, not due to bad luck alone, but from insufficient due diligence, oversized cheque sizes, and indifference to valuation or deal terms.

If one can realistically live below their means, avoid status-driven consumption, and steer clear of opaque private deals, then more capital can be preserved for productive, compounding growth, the kind needed to bridge the wealth gap.

The Inevitable Game

Some may argue that we don’t have to participate in the pursuit of social mobility and could simply choose to live a different life. To a certain extent, it is true, but most likely it won’t be a life that people actually want.

Living in any desirable city in the world where jobs, culture, education, healthcare and like-minded people are comes with a hefty price tag. Not pursuing upward mobility often means dependence, vulnerability or even isolation. Remember the wave of people who moved to regional areas during COVID? Most moved back to the cities. Proximity to opportunity still matters.

If we do achieve a functional society in the future where people are free to choose what they do and what they don’t do, the freedom will likely be architected only around the baseline of survival, not aspiration.

The point isn’t to worship wealth or chase status. It’s to understand that wealth enables optionality. It gives us the room to walk away from bad jobs, bad relationships, and bad environments. It lets us raise a family where we choose, work on what matters to us, and protect our time.