Anyone interested in investing in stocks can't help but notice the current stock market is far different from what it was a generation ago. But one aspect of that change, one that could help ease the stark U.S. racial wealth gap, gets little attention.
XTechnology has thrown open many doors to the financial industry, once an exclusive community of initiates, and decidedly white and male. Today, virtually anyone with internet access who is able to scrape together some cash and courage can jump into investing in stocks.
Yet African-American and Hispanic consumers have been slow to embrace this new era. Research still shows Hispanic and black Americans investing in stocks at much lower levels than whites with similar incomes and education. They also lag Asian-Americans, who outpace all of these groups when it comes to holding taxable trading accounts.
Does it matter? Investing in stocks certainly doesn't guarantee wealth. But it is widely viewed as an important element of a healthy retirement plan. Healthy retirement plans, in turn, are seen as an important step to narrowing the racial wealth gap.
Even investors who just kept pace with the S&P 500 increased their invested capital by an average of more than 166% over every 10-year period since 1979. Many minority Americans remain cordoned off from such stock market benefits. This is partly due to a history of discrimination, and partly due to psychological hurdles carried in the cultures themselves.
Stock Market Participation Barriers
Technically speaking, today's stock market presents individual investors essentially no barriers to entry. Opening a trading account requires little more than a name, address and bank account info. Any 18-year-old kid with $500 (even less, in many cases) can launch an account and start to learn about investing in stocks.
Brokerages ask few questions about credit history, employment, education or overall net worth, unless an account holder wants to use somewhat advanced techniques or services. Those can include trading on margin or buying and selling stock options. And while names can reveal whether an account holder is male or female, rarely, if ever, will a brokerage ask a client's ethnicity or race.
So, is it fair to ask whether today's stock market has, at least in some respects, become colorblind?
"The stock market itself is clearly agnostic about whose money it is," said Mellody Hobson, the former DreamWorks Animation chairwoman, now president of Chicago-based Ariel Investments. But "while the market itself may not discriminate — and I'm using that term intentionally — the environment by which someone might come to invest can be discriminating."
The Racial Wealth Gap And The Stock Market
The stock market is a steppingstone for U.S. families working to join the middle class or move beyond it. But assets matter, and the racial wealth gap continues to increase in the U.S.
Consider statistics from the Economic Policy Institute, a Washington-based think tank focused on economic issues facing low and middle-income Americans. The data show white middle-income households (earning between $37,201 and $61,328 per year) own an average $86,100 in assets. Assets average $11,000 for black families and $8,600 for Latino families in the same income range.
A 2015 survey by Ariel asked Americans with household income of at least $50,000 whether they owned stocks or stock mutual funds. Eighty-six percent of whites said they did. For African-Americans, the number was 67%.
Both of those tallies had improved — up 7% over Ariel's 2010 survey.
Among Hispanics, a 2014 Wells Fargo survey found that 47% of participants would prefer to place money in no-risk savings accounts, rather than in stocks or various funds. That compared with 35% for U.S. investors overall.
Causes Of The Racial Wealth Gap
The reasons for this racial wealth gap and reluctance to open trading accounts are nuanced. And the reasons often feel personal, even though they may be shared by many people across a culture.
Discrimination has certainly been a root cause of the racial wealth gap. And if you don't have money, you're unlikely to buy stocks. Plus, if you don't know other investors or brokers, you're less likely to walk into EF Hutton to open an account.
Until the 1990s, stock trades were done almost entirely over the phone, person to person or through brokers. Commissions often ran into the thousands of dollars, putting the market out of reach of many. Brokers prioritized their clients partly on their financial standing.
That and other roadblocks turned many minority investors away from the stock market and toward other venues, such as real estate. And for many who were curious about the stock market — and this remains true today, Hobson says — the overwhelmingly white male world of financial advisors and other investment and banking experts can feel like foreign turf.
"Does that person of color feel comfortable walking into that brokerage firm office or that financial advisor's office?'' asked Hobson. "Do they see people that they think represent the diverse society that we live in? Do they feel that somehow there are barriers to entry for them, because of just the environment?"
Any of those factors can preclude investment, Hobson says.
Investing In Stocks: Group Support
To be sure, the internet has changed the process of investing in stocks. It can be entirely private, pursued in small groups or within larger communities chosen specifically by the individual investor. (These include IBD MeetUp groups, currently held in 46 states and 14 sites internationally.)
Fees for trading and various account services differ depending on how often clients trade, account size or other factors. But people's names, how much they earn and where they live have no impact on account fees or stock market access.
Still, a visit would show that minority representation at the New York Stock Exchange remains low. A glance at data on financial advisors reveals a similar state.
A powerful fact remains: Ethnicity and race greatly affect whether a person is exposed to stocks and begins to understand the market at a young age. For minorities, that lack of exposure plays a key role in the racial wealth gap. Potential investors in the black and Hispanic communities are often the first generation in their families to attain levels of income sufficient to allow them to invest.
Risk Adversity And The Racial Wealth Gap
The desire to learn is there. The Wells Fargo survey found 72% of Hispanic investors wanted to know more about investing in mutual funds, stocks and bonds. That compared with 64% among U.S. consumers. Lack of familiarity with the concepts of investing in stocks were a key roadblock, says Xochitl Leon, a Harvard-trained economist who heads Wells Fargo's Hispanic Segment Strategy group.
Then there's the common preference for real estate and for no-risk savings accounts.
"This is a community in which we have higher risk adversity," Leon said.
Over the past two years, savings rates have accelerated among Hispanics, Leon says. But the group channeled an even larger-than-normal share of those funds into lower risk savings and nontaxable retirement accounts. The money is essentially being socked away where it seems safest and most accessible.
So there is something out there steering Hispanics further away from risk-related investments and "signaling people that you've got to save more," said Leon.
Pensions Vs. 401(k)s
Among African-Americans, Hobson says that traditionally many of those with the most earnings power had government or other jobs that provided pensions, rather than plans like a 401(k). Those pensions offered no pathway into investing in stocks, leaving prior generations with little or no investing knowledge to pass on.
Online investing and education tools are helping to bridge those barriers. More employers also are offering 401(k)s. And demographic change — a U.S. population that is becoming young and more diverse — is producing a tech-savvy crop of budding investors. This is helping to propel avenues such as automated investing via so-called robo-advisors.
Unlike starting a self-directed online trading account, the threshold of assets needed to start working with a financial advisor, Leon says, "is not modest. It's significant for the average person."
So online tools offer a lower-cost starting point.
"The entry point is lower," Leon said, "but then (the question is), Where do I start?"
Demographic Trends And Investing In Stocks
Banks and brokers like Wells Fargo that are attempting to build their Hispanic and minority clienteles are seeking ways to marry the two advice models. The goal, Leon said, is to "make it accessible, but provide one-on-one guidance at the early stages."
Most brokers provide simple online tutorials on using their investing programs and understanding how the stock market works. (Investor's Business Daily also provides ground-up education on how to invest in the stock market, as well as videos explaining investing in stocks for beginners.)
A key reason why banks and brokers are concerned about minority participation rates is because the demographics of the stock market, like those of the overall U.S. population, are in transition.
Americans under age 55 are now the majority. In 2019, millennials are expected to surpass baby boomers as the largest age group in the U.S. These younger Americans, born between 1981 and 1996, are increasingly diverse. Gen Z Americans, now less than 20 years old, are 48% nonwhite.
"All the growth in this young population nationally, and in a lot of states and in a lot of metropolitan areas, is due to racial minorities," said Brookings Institution demographer William Frey, author of "Diversity Explosion: How New Racial Demographics are Remaking America."
In the business world, Frey said, "that means those are your customers, those are your workers; you need to prepare for that."
That certainly holds true for the stock market and its surrounding industries. One challenge in working to recognize and address disparate stock market participation and the racial wealth gap comes from discrepancies in the data.
Statistics On Investing In Stocks
Data from the FINRA (Financial Industry Regulatory Authority) Foundation show that 22% of blacks, 25% of Hispanics, 36% of whites and 47% of Asians held taxable investment accounts.
Those numbers include data for all survey respondents, says FINRA Research Director Gary Mottola. When sliced and diced to compare similar income and education levels, the 14% difference between blacks and whites with taxable accounts shrinks to 7%. Between Hispanics and whites, the difference narrows from 11% to 4%.
"There still is an investment gap, but it is not as big," Mottola said.
401(k) Plans As Stock Market 'Gateways'
One factor that does appear consistently across the Ariel, Wells Fargo and FINRA data is the effect of 401(k) accounts. Access to an employer-sponsored retirement plan is highly correlated with having a taxable investment account.
"In other words," Mottola said, "employer-sponsored retirement plans are a gateway to taxable accounts."
The connection between 401(k)s and investing in stocks has gained importance. The 401(k) plan is seen today as the main financial instrument supporting retirement. Reliance on pensions is fading, and social security income is viewed as increasingly risky.
But race and ethnicity also affect attitudes toward employer plans and matching programs. Surveys clearly show apprehension and lower participation rates, even among younger employees of color.
Hobson encourages companies to look at their 401(k) plans by race. Time after time, she said, "You see these racial differences that lead very quickly to a sense that something needs to be done to fix it.''
How To Start Investing In Stocks
Investors looking for places to start investing in stocks have various options, depending upon their concerns, goals and where they're getting started.
They should keep in mind several basic facts. Foremost among those: There is a learning curve. Learning to invest takes time and effort, but the payoff, particularly for those who start young, can be substantial.
Start by investing a small amount of cash, or create a "paper" account that buys and sells real stocks in an experimental virtual account.
Brokers such as Charles Schwab (SCHW), Fidelity and Interactive Brokers (IBKR) require no minimum balance to open an account.
A good starting point for beginning investors is IBD's annual Best Online Brokers review. It includes a list of the best online stock brokerages based on a survey of thousands of investors who rated the strengths and weaknesses of their primary broker.
The FINRA Foundation, an educational group funded by, but separate from, the FINRA regulating authority offers a number of services. Its online BrokerCheck tool allows investors to verify the background and qualifications of any broker or investment advisor.
Education Programs For Beginning Investors
Mottola says FINRA does not directly address most of its outreach programs toward specific cultural groups, per se. But it does gear many financial and market outreach programs directly to lower-income consumers, many of whom are most directly affected by the racial wealth gap. Those programs include partnerships with libraries, the military, Native American communities and youth groups.
"Our actual education programs are written for all Americans, although the channels that we often use to disseminate that education will often hit minorities at a greater rate than nonminorities," Mottola said.
Reaching such groups is a big deal, Hobson said, "because you are talking about the difference between retirement security and not having retirement security."
And Americans who don't have retirement security are more likely to become a burden on society, she says.
"So we pay," Hobson said, "one way or the other."
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