The Stock Market Should Not Be Black and White
In response to the killing of George Floyd by a Minneapolis police officer on May 25, 2020, protestors took to the streets from coast to coast in support of the Black Lives Matter movement, demanding justice for Floyd. These protests cast a spotlight on the racial disparities in policing in the United States. They also prompted a national dialog about the inequalities in income, education, careers and overall opportunities that many African Americans and members of other minorities endure.
One facet of this discussion that remains overlooked, however, is the startling racial disparity in participation in the stock market. Ownership of equities — which may be held directly or indirectly through a retirement account — varies substantially across groups. According to data from the Federal Reserve, more than 60 percent of White families own equities, compared with approximately 30 percent of Black and Hispanic families.
Investing in the market does not guarantee wealth or success, but the levels of stock ownership is a contributing factor in widening the racial divide. White households exceeded $13 trillion in dividends and buybacks between 2004 and 2019, compared to $181 billion for Black households. Meanwhile, the annual returns from the S&P 500 have averaged 17 percent over the past 10 years, leaving many Black and Hispanic households on the outside looking in.
Taking stock of the lack of racial diversity in the stock market
Some of the statistical racial differences in the stock market may be based on choice or precedent. Researchers note that some Black investors turn to safer options based on a broad range of rationales, including fear, past discrimination, differences in financial-literacy education and lack of awareness of investment options.
However, lower incomes and higher rates of incarceration — as well as educational disparities and structural barriers — all contribute to lower household incomes, which often translates into fewer investment opportunities. It may also be an issue of legacy: Many African-Americans are among the first generation with the means to invest, which means, for example, that they haven’t necessarily had investment tips passed down to them or received a savings account or 529 plan on their first birthday.
All of these factors contribute to the racial divide in the market.
And that’s not all
Naturally, the investment disparity goes beyond stock market participation. More than 60 percent of white employers are provided the option of an employer-sponsored retirement plan. That figure drops to 52 percent for Black workers and plummets to just 38 percent for Hispanic employees, according to the National Institute for Retirement Security.
Home sweet home is also more comfortable for white families: 70 percent are homeowners, with an average home value of $200,000. For Hispanic families, those numbers drop to 45 percent and $73,000, respectively, and are 44 percent and $54,000 for Black families. White families are also less likely to carry student debt.
Taken together, these financial inequities can make it harder to save for retirement, invest in the stock market and build personal wealth.
A time for change
Just as those same protestors ask for effective changes in policies, treatment and opportunity, a movement to transform the investment world is also intensifying.
For the first time in its century-plus history, a Federal Reserve regional bank has a Black president, Raphael Bostic, who has strongly encouraged greater opportunities for minority groups and the less wealthy Americans. Other leaders in the industry aspire to increase the number of Black financial advisors in the country. Although there are more than 87,000 certified financial planners in the United States, only about 1,200 of them are Black, a statistic many wish to shift to potentially engage more diverse investors.
Today, the stock market is much easier to access, making it available to most people. Zero-commission apps and how-to podcasts for traders can help even the most inexperienced investor get started for as a little as a few dollars.
Offering information and research for investors across the spectrum, Investors Prism’s PRISM stock indexes track small- and micro-cap companies across a spectrum of innovative industries, including life sciences, medical devices, diagnostics, genomics, biotech and the digital economy.
As more nonwhite investors move into the stock market, the trend could potentially narrow the wealth gap going forward. In the short and long run, stock market earnings can help families pay for wants and needs, including mortgages, tuition bills, new vehicles — and the ultimate goal of retirement. And failing to address discriminatory practices will continue to impede economic growth. For example, Citigroup estimates that addressing discrimination against African Americans could boost the economy by $5 trillion over the next five years.
Even as the pandemic extends into another season, leading to additional job and home losses, the stock market continues to mostly move in the other direction. In time, the market may offer the ability to reduce racial and wealth inequalities in the United States through equal opportunity and access.
