Last year, we saw nationwide unrest and protests over the brutal killing of George Floyd, an unarmed Black man who was killed by White police officers. His killing brought to light the many ways through which the system is failing African Americans in everything, from policing to education to public health. This inequality also means that African Americans are unable to improve the quality of their lives through investing in things like stocks- which is an important source of generational wealth. This blog looks at the various reasons why Black people are yet to invest in the stock market.
Lately, there has been a surge in the number of Black people investing in the stocks, but despite that, only a fraction are benefiting. In fact, according to data from the Federal Reserve, only 33.5% of Black people owned stocks in 2019. But there are various factors that have led to this trend, the main one being the fact that there has been a longstanding preference for safer places to invest among Black Households. That coupled with the fear stemming from the legacy of bigotry and discrimination against minority communities in America makes Black people less optimistic about investing in the stock market.
In addition, Black households have been denied equal opportunities almost in everything. This cuts across every fabric of our diverse society, permeating to social institutions like investment education, homeownership, justice among many others. That translates into a far lesser scope of knowledge of investment in the stock market, which can amplify savings and build wealth for retirement. As a result, Black people in the US have a median level of household income that is around 10 times lower than that of Whites.
When compared to the non-Hispanic whites, African Americans often lack the opportunities to build wealth. Even the wealthy Black households are much less likely to buy stocks which means in the last decade alone, a good number of Black people missed out on at least 260% return for the S&P 500 funds. Typically, a normal Black household has about $13 short for every $100 held by the white family. The main factor contributing to this is the long history of redlining and other discriminatory practices. Research indicates that if African Americans and other minority groups could invest in the stocks and maintain the practice into the future, this could help narrow the racial wealth gap. In an effort towards that end, several groups are encouraging African Americans to become financial planners, who could draw in potential investors.
From a historical perspective, wealth is generational, which means that if your family did not have the opportunity to accumulate wealth in the past years- say may be due to issues like discrimination; this can affect their ability to pass down wealth to you and your generations. In addition to that, many of the Black households have faced countless economic issues including owning real estate that is undervalued when compared to those of the whites and also being left out of the wealth-building social programs for instance the GI Bills and the Homestead act.
Today, most of the Black households are in the middle to high-income earners, but, it is important to note that Americans are not all at the same starting line. This means that there is a high chance of the existing racial wealth gap feeding into the investment gap. Simply put, the lesser money you have, the lesser your investment chances. To be able to invest in the stock market, or to be able to participate in any form of investment, you have to have a ‘surplus.’ You cannot invest your rent and call it an investment.
The disparity in stock investment between the Black households and the White households can be attributed to many factors, but the main ones include the lack of homeownership, disparity in income, and the lack of financial resources and education to invest. Given all these factors, it then becomes clear that Black Households cannot catch up in the investment race when the disparity is so overwhelming. Research also indicates that Black people tend to be risk-averse which is another critical factor explaining the investment disparity between Black households and White households. Therefore, rather than investing in stocks that are known to carry a risk factor, Black households prefer to own assets that have a reputation of being safer, for instance, bonds, life insurance, or real estate. This means that most Black households are shortchanging themselves by investing in more secure that have lesser yields. Over the last decade, while the largest stock fund has returned over 257% for the investors, the largest bond has returned less than 40% over the same period. Other investments such as real estate also have made fewer returns.
This difference in the choice of investment is one of the main reasons why the typical white non-Hispanic household will continue to have a high net worth. In fact, in 2019, it had $189,100 versus the $24,100 for the median Black household. That gap compares with a little more than six times at the start of the millennium.
“Especially if you talk about working for 30 to 40 years and steadily contributing to a retirement account and not taking it out when you change jobs or borrowing against it, you would come out way ahead” with a portfolio that has stocks in addition to lower-risk investments, said Sherman Hanna, a professor at Ohio State University who does research on financial planning. He calls it “the easy route to accumulating at least some amount of wealth.”
So much time has passed on and still, the financial industry continues to be dominated by the whites. This has been a difficult trend to break, simply because the White people who grew up in the wealthier neighborhoods have it easy building up the business and also, they are often receiving promotions. With fewer Black people in the financial game, running big companies, or offering their services as financial planners, many potential Black investors may feel that buying stocks is not for them. There are about 87,000 certified financial planners in the country and only 1,200 are black. This paints a bleak picture of why Blacks are missing out on the bigger picture, and why they feel the investment is not for them.
Even though there has been a chronic shortage of black financial advisers, most advisers are saying that they are seeing an increased interest from young Black adults who want to learn more about stock investment. However, culture plays a significant role with some Black families warning their young adults who are in the stock arena that they could lose their money.
“Culturally, I think African Americans are not raised to build equity,” he said, “but I do think the tide is turning.”