By Jackie Fontana, CFP
Perhaps unlike most investment professionals, my first exposure to the concept of the stock market came while watching an episode of Silver Spoons in the mid-80s. I recall the episode vividly: Ricky Stratton scrolled through the newspaper, tracking his stock performance, and lamenting his poor choices as part of a school project. It was clear his stock choices held real-life implications for how much money he gained or lost.
I recall being intrigued and wanting to learn how to decipher those symbols and numbers in that newspaper. It looked foreign and complicated and not one member of my Korean-immigrant family could provide any insight into what those symbols meant, let alone how to interpret them.
It goes without saying that any childhood exposure to a moderately sophisticated investment strategy was not a routine part of my upbringing. The Korean stock exchange did not exist until the early 1980s, just a few years prior to my family immigrating to the U.S. Not having any familiarity with financial markets, I do not fault my parents’ preferred savings vehicles: savings accounts and CDs.
Unfortunately, even today, such stories are all too common in many minority households. The long-term impact of missing out on growth provided by a diversified portfolio of stocks has significant ripple effects on generational wealth and the ability of families to leverage their hard work for the benefit of future generations.
Stocks versus cash: Risk presents a clear advantage.
The historical superiority of stocks over the long run as an investment vehicle compared to CDs is indisputable. Historical returns of the S&P 500 have increased in value of roughly 166% over each 10-year period since 1979. If you had put $10,000 in S&P index funds in 2010, it would have grown to $38,730 by 2020, averaging 14.5% per year. Contrast that to CD performance: The same $10,000 investment in 2010, assuming the national average CD rate from 2010-2020, would yield a mere 0.77% annualized return for an ending value of $10,807 — well below inflation.
Unfortunately, many Americans — particularly non-white households — are missing out on such robust market growth, exacerbating disparities in a growing wealth gap. According to the 2019 Survey of Consumer Finance by the Federal Reserve Board, the median net worth of a white family was $188,200, an amount nearly eight times the wealth of the median Black family ($24,100) and five times the wealth of the median Hispanic family ($36,100), respectively.
Minority attitudes lean towards risk aversion.
Setting aside the structural barriers that will take years to reform and are extremely salient, but also beyond the scope of this discussion, several factors contribute to the growing wealth disparity of minority households, including income, inheritance and home equity. Furthering this challenge, while many minority households save diligently, they often choose risk-free asset classes that yield lower rates of return, typically translating into underinvestment in the stock market. Thus, a component of the wealth divide is driven by investor behavior and asset choices minority households make.
A Wells Fargo survey of investment preferences supports this insight, showing 47% of Hispanics preferred no-risk savings accounts, compared to 35% for general U.S. investors. Furthermore, data released by the Federal Reserve indicates that only 33.5% of Black households owned stocks as opposed to 61% of white households.
A complex set of drivers are underpinning under-investment.
At a high level, a myriad of factors may drive minorities’ underinvestment in stocks. An admittedly non-exhaustive short list would likely include the below:
· Distrust in the financial system, including “foreign-turf” factors, such as feeling uncomfortable with predominantly white financial advisors and investors.
· Preferences for accelerated mortgage payments over investing “surplus” income in the stock market.
· Tendency to invest in children’s education over the stock market.
· Cultural biases towards cash and risk-free assets.
· Lack of financial literacy associated with stock market investments.
· Lack of peer groups that can share information and point investors in the right direction.
A comprehensive set of solutions, locally applied, over time can help bridge the minority wealth gap.
Fortunately, incremental steps are being taken to help bridge the wealth gap. Nevertheless, there is much work to be done to further these efforts, including the following.
Developing avenues for financial literacy: While education can come in many forms, broadly speaking, it is the best method for beginning the process to shoring up the wealth divide. Many financial institutions and community groups are providing outreach programs to consumers directly affected by the racial wealth gap by teaching financial literacy. Look for one through your local library, military and youth groups.
Taking advantage of easily accessible investment vehicles: Employer-sponsored retirement plans such as 401(k)s and 403(b)s are broadly available vehicles for many minorities. As reported by Investor’s Business Daily, data indicates that “access to an employer-sponsored retirement plan is highly correlated with having a taxable investment account.” Investment accounts such as these represent an opportunity to learn about some integral investment concepts, including company matching programs, dollar-cost averaging, pre-tax savings, and long/short-term market behavior.
For example, an employee can contribute up to $19,500 annually into the employer-sponsored plan, plus an additional $6,500 if 50 and older. Assuming a 25% tax rate, the employee can save up to $4,875 (or $6,500, if 50 and older) in taxes. Such a mechanism effectively serves as an interest-free loan from the government, providing extra cash to invest in the market without any tax burden until withdrawn.
Overcoming fear and distrust of financial institutions and markets: Minority households may have difficulty fully trusting financial institutions due to history and concerns about cultural fit. Traditionally, stockbrokers purchased and sold stocks for affluent individuals, who paid high commissions. Increasingly consumer-oriented online platforms and zero-commission trades have changed this landscape making it accessible for anyone to invest in the stock market.
One way to overcome fear of the market is having a disciplined approach of using the dollar-cost averaging method. This method divides the large sum of investments in equal parts overtime and thereby reduces the impact of volatility on a large purchase. Another consideration is partnering with an investment professional, such as a fiduciary that can guide you through your investment journey by developing a comprehensive plan to reach short-term and long-term financial goals. A fiduciary can help you implement a more disciplined approach to the market and reduce the risk of emotional buying and selling. More time spent invested in the market along with the right help and resources will help guide you to become more confident and able to weather market volatility.
While I am grateful for Ricky Stratton’s role in sparking my interest in the stock market, it is my hope that better educational resources for minorities will mean that they will not have to rely on 80’s sitcoms for their first exposure to an investment strategy, as I did. If I were to go back to my younger self who had no cultural/parental influence on investing in the market, this is the advice I would give myself: Take advantage of retirement accounts, no risk = no returns; stay “in the game” long term and your investments will pay off; diversify your risk; and finally — find a good professional who you trust and can work with to guide you through your investment journey.
About the author: Jackie Fontana, CFP®
Jackie Fontana, CFP®, is an associate portfolio manager at FBB Capital Partners, where she partners with her clients to help them achieve success on their most important life goals, including college planning, retirement preparation and legacy planning.
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