Long fearful of the stock market, black Americans generally have stayed clear of stocks and mutual funds for generations, and consequently many with solid incomes have lagged far behind whites in accumulating wealth.
But the trend is starting to turn, with 401(k) plans making blacks less reluctant than past generations about investing, a national study by Chicago-based Ariel Investments shows. And if the trend continues, black Americans will start to ease the massive wealth inequality that exists between black and white Americans, said Mellody Hobson, Ariel’s president.
Currently, about 67 percent of African-Americans with incomes of at least $50,000 have money invested in stocks or stock mutual funds. That compares with 60 percent in 2010 and 57 percent in 1998, the first year that Ariel started doing national surveys to compare investing attitudes and behavior of the races.
Over half of African-American investors surveyed by Ariel said workplace plans were the most important reason for becoming an investor. During the last few years, employers have been enrolling their employees automatically in 401(k) plans without seeking permission first. As a result, employees have ended up with stock and bond investments that have been growing during the bull market that began in 2009.
In 1998, 81 percent of whites were investing in the stock market. Now 86 percent of whites with incomes of at least $50,000 have stock or stock fund investments — the highest level Ariel has ever found.
Both white and black Americans shied away from the stock market after the 49 percent crash in 2000-2001 and the 57 percent crash in late 2007 to early 2009, according to Ariel surveys.
The 2000 crash came after a euphoria about the stock market and tremendous hype over technology stocks that turned out to be misleading. Investing by blacks had hit its highest level before that crash scared away investors. At the peak, 74 percent of blacks had stock investments either directly or through mutual funds, according to an Ariel survey from 2002. After the scary decline, black involvement fell to 61 percent, and after the housing crisis and recession, participation by blacks in the stock market fell to 57 percent.
The lowest level for whites during the disappointing period was 76 percent.
The question not answered by the Ariel survey is what will happen if the stock market falls hard again. The interviews for the survey were done last summer, before the recent stock market slump. In January, the Dow Jones industrial average declined 5.5 percent.
Hobson said she was encouraged by the optimism the survey found among blacks and sees it as a potential opening to build more investing behavior among African-Americans. Although only 50 percent of whites are optimistic about the economy, about 75 percent of blacks said they feel hopeful about the economy, and 65 percent of blacks thought the economy had either recovered from the recession or was on its way to a full recovery.
Blacks were hit hardest of any racial group in the 2008 financial crisis and recession and did not bounce back like whites, in part because the primary source of wealth for blacks was their homes and not the stock market, according to research by St. Louis Federal Reserve economist William Emmons.
After early 2009, the stock market climbed more than 150 percent, restoring wealth to people with those investments. Many blacks had trouble recovering because they had little equity in their homes, lost jobs, and could not take advantage of low interest rates to refinance, said Emmons.
In 2014, he found that the median Hispanic and black wealth levels were about 90 percent lower than median white wealth even though income levels were only 40 percent lower. That suggested the investment choices played some role in the difference.
“The larger wealth gap could be due to Hispanics and blacks investing in low-return assets like housing, as well as to borrowing at high interest rates,” he said. Historically, he noted, homes appreciate at close to the rate of inflation while stocks — despite scary periods of decline known as bear markets — have averaged much stronger returns. Since 1926, the average annual return has been about 10 percent.
Prior to the housing crash, Ariel surveys showed African-Americans were strong believers in housing wealth. They saw homes as stable investments. But that has changed dramatically. In 2004, 61 percent said real estate was the “best overall investment.” But that fell to 30 percent in 2010 and was only 37 percent in Ariel’s most recent survey.
Meanwhile, the percentage of blacks saying the stock market is the “best overall investment” jumped from 28 percent in 2004 to 41 percent in the recent survey.
Blacks continue to be more leery of the stock market than whites. When Ariel asked people who weren’t investing in the stock market to cite a reason, 56 percent of blacks and 53 percent of whites said it was too risky. Having enough money to invest was secondary, with only 44 percent of blacks saying that was the reason for not investing.
Blacks are more likely than whites to say it’s important to get the timing right for stock market investing, although financial advisers say the key is to combine stocks and bonds and invest a little at a time continually. They say guessing when stocks will climb or fall is impossible even for the best and brightest pros.
More than half of black investors said workplace plans were the most important motivator for becoming an investor.
Meanwhile, after going through the financial trauma of the last few years, both blacks and whites have greatly changed expectations about when they will retire, though blacks are more optimistic. In 2003, 42 percent of blacks and 28 percent of whites thought they’d retire before age 60. Now, only 17 percent of blacks and 10 percent of whites think they will.