To hear Mellody Hobson tell it, African-Americans have paid a high price for shunning the stock market.
The president of Chicago’s Ariel Investments has tirelessly campaigned for black households to pour their money into equities. Every year, she puts her star power behind a survey with brokerage Charles Schwab & Co. that keeps the issue alive.
So in the wake of the market plunge, who’s sorry now?
Stocks remain the best bet, no matter how small the nest egg, she said in an interview last week: “If you have fewer assets, but you’re willing to take a long-term view, put them in the area with the greatest return.”
That’s conventional wisdom in the investment game. But the current market debacle has revived old doubts about many financial platitudes. These days, to some, the African-American community’s traditional skepticism is ringing more true than the usual truisms.
The most recent Ariel-Schwab survey shows that 62 percent of blacks with incomes of $50,000 or higher own stocks or mutual funds, versus 82 percent of whites. In the survey’s 11 years, black stock ownership has varied from a low of 57 percent to a short-lived high of 74 percent during the dot-com boom. White ownership has stayed around 80 percent.
One explanation: Black households typically put more emphasis on the market’s risks and volatility, believing success requires close attention and expert timing. Also, with fewer investable assets, blacks feel more vulnerable to bear markets. The median net worth of the average black family is 10 times less than that of the average white family, a 2006 National Urban League report found.
Those reasons make good sense, said Zvi Bodie, a visiting finance professor at MIT who recently issued a press release headlined, “Sell your stocks.” Anyone saving for retirement would be better off in government bonds pegged to inflation, he said – particularly African-Americans.
“People with less wealth can ill-afford to take risk with their hard-earned savings,” he said. “If you cannot tolerate a loss, stay away.”
In addition, black households generally feel isolated from the corporate world. Lacking the knowledge and resources to invest with confidence in the financial markets, African-Americans tend to favor real estate or other tangible assets.
Good point, said John Campbell, a Harvard University economist who analyzes long-term stock returns: “If the caution is based on the feeling that they’re at the end of the chain of information, perhaps there is some wisdom in that caution.”
To an extent, the fears also are warranted because investors shouldn’t automatically rely on stocks for the highest return over the long run, Campbell said. “It cannot be true that stocks are always the best investment at any price.”
Still, Campbell sees opportunity in today’s market. With prices down and yields up, he said, “This is a much better moment to buy stocks.”
For many investors, he noted, “It’s a good idea to have some stock. On average, there is a reward for taking risk.”
No surprise, Hobson is more emphatic. Over time, stocks outperform every other major asset class, including real estate, she said. “Stocks are so cheap. The biggest risk is not investing.”
And while the recession has undermined faith in a slew of business practices and assumptions, she has seen nothing to shake her convictions, she said. “I never believe this time is different.”
Copyright 2009? McClatchy Tribune Information Services