Invest. By Any Means Necessary.
By all accounts, 2020 was a banner year for the stock market, with the S&P 500 Index returning 16.3%…more than double its long-term historical average of 7.5-8%. Even more remarkable when you consider the record volatility and economic fallout brought on by the pandemic. It was almost reminiscent of the dot-com era, when all you had to do to make money was simply show up or participate in the markets in some manner (it remains to be seen, however, if we will witness the same cascade of newly minted investment “gurus” hawking investment advice on their new radio and cable television shows). Better still, it conjured up images of Jeremy Siegel’s infamous monkey, blindfolded while throwing darts at the stock market section of some financial publication and, not surprisingly, landing on a winner.
O.K., I am being a little hyperbolic. Last year’s overall stock market record performance was, by no means, a guarantee of success on an individual level. But do not take my word for it; just ask the 60% of U.S. large-cap stock-picking funds whose performance lagged the benchmark S&P 500 (according to new data from S&P Dow Jones Indices) in 2020, marking the eleventh consecutive year of underperformance.
Collectively, Blacks have also failed, historically, to outperform the benchmark index. And it is not because Blacks have been notoriously poor stock/fund pickers. The culprit, instead, has been a lack of participation relative to other races or ethnic groups at equivalent income levels; that is, we have simply not shown up in comparable numbers to give ourselves a chance to win or throw our dart, blindfolded or not. According to the 2020 Ariel-Schwab Black Investor Survey, 55% of Blacks reported stock market participation, versus 71% of whites. This is down from 2008 when 57% of Blacks said they owned individual stocks or mutual funds. In a nutshell, this means less money saved for retirement and, equally pernicious, less wealth to pass onto future generations.
One of the oft-cited explanations for the participation disparity has been the deep-rooted distrust of American financial institutions, with only 35% of Black investors who feel they are treated respectfully by financial institutions, compared with 62% of white investors. This is certainly problematic. It is rather difficult to trust someone to invest your hard-earned dollars if you feel they have no respect for you as a person. Real or perceived, it is a systemic challenge for our financial institutions, one that requires the same level of gravity and resolve as our efforts at diversity, equity and inclusion (DEI). On the other hand, continuing to place an emphasis on the hiring, training, and development of minority financial advisors will likely serve to narrow the participation gap.
“Black Americans are already behind the eight ball, and it is disheartening to see that at current savings and investing rates, the wealth gap will continue to expand, endangering our futures and leaving our families exposed”. (M. Hobson, CEO Ariel Funds)
Lack of a robust savings program has also been a contributing factor. Blacks currently save approximately 57% of the dollar amount whites save on a monthly basis ($393/$693). A significant disparity exists even for those Blacks who earn more than $100K per year when compared to their white counterparts. Thus, it is not a matter of failing to earn sufficient income to save. However, I do acknowledge an argument on this front can be made as it relates to historically high unemployment rates among Blacks whom, often, are the last to get hired and the first to be fired. Employment plays an outsized role in stock market participation, especially when we consider that 63% of Black investors’ first investment in the stock market is via a 401(k) or other retirement plan.
As consequential as homeownership is to the accumulation of wealth, the almost-exclusive focus on homeownership as the sole source of wealth accumulation has, I believe, had a measurable impact on the stock market participation gap. The myriad benefits of homeownership should always be part and parcel of a comprehensive, holistic educational/awareness program.
Perhaps, one of the most effective ways of combating the lack of savings and its contribution to the stock market participation gap is through the expanded, more-aggressive use of financial literacy programs. Such programs require the same level of vigor and deliberateness as our efforts at promoting homeownership. From 1994-2004, the homeownership rate among Blacks jumped from 42% to 49.7% (See FRED Economic Data, Homeownership Rate for the United States: Black or African American Alone), thanks to our efforts at educating aspiring homeowners and facilitating homeownership. And though we have lost some ground, exacerbated by the Great Recession of 2008-2009, the number stood at 47% prior to the pandemic.
It also requires a more-intimate degree of collaboration between our junior high and high schools as well as community churches and organizations. Having the concept of financial literacy pounded into the heads of our youth as a mandatory piece of junior high and high school curriculum should be a no-brainer. Communicating the idea of investing as a form of long-term, active savings with wealth-building benefits—thanks to the magic of steady, consistent compounding—could produce huge future dividends.
Incidentally, such an expansive, collaborative program does not absolve Black parents of responsibility in this regard. Leading by example and teaching our kids the basics of budgeting and saving still produces the most bang for the buck.
There is more cause for hope.
It appears the degree of the gap in stock market participation varies by age demographics, with younger generations (40 and under) experiencing participation rates at levels commensurate with their white counterparts. The Robinhood phenomenon, whether one perceives it on its own merits as a net positive or not—coupled with the boredom from last year’s Stay-at-Home orders—appear to have accelerated this trend.
Additionally, more Blacks are now engaging in conversations about the stock market with their family and friends, effectively spreading the word. And we know there has never been a more effective marketing campaign invented than word-of-mouth. For Blacks under the age of 40, 18% indicated they have discussed the stock market growing up, more than twice the number of older Black investors. This is good news.
I am very hopeful that, as a community, we will continue to build on the momentum sparked by younger generations. It is imperative. Positioning ourselves for a comfortable retirement—as well as positioning our children and grandchildren for the improved odds of success that accompanies a transfer of wealth—demands we get on a steady path of investing…by any means necessary.
I.D. Amandah