- Research has proven that if you want to grow your wealth, you need to own stocks. So why don’t more Americans invest in the stock market?
- Today, Alexander Green explains the three main reasons and helps investors move past them.
A significant reason for the gulf between the wealthy in this country and everyone else is stock ownership.
Studies show that roughly half of Americans own no stocks, either directly or through mutual funds and ETFs.
On the other hand, according to a recent study by New York University professor Edward N. Wolff, the wealthiest 10% of Americans own 84% of the shares of all publicly traded companies.
In fact, the top 20% are responsible for 90% of all stock ownership. This is what statisticians call a meaningful correlation.
It’s not just that people with money are able to buy more shares.
It’s that equities have been the world’s best-performing asset class not just for the last few years or even the last few decades – but for the last two centuries.
(If you are unaware of the powerful data that confirms this, I strongly encourage you to pick up a copy of Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies by Wharton professor Jeremy Siegel.)
If you want to get rich, you need to own stocks. So why don’t more Americans own them?
There are three primary reasons. The first, obviously, is that some people don’t work or – more commonly – don’t save. They spend everything they earn.
This is not just a problem for low-income earners. As a former money manager, I’ve known plenty of people from all walks of life – doctors, lawyers, engineers, even Wall Street professionals – who blew through everything they made each year.
As anyone who’s climbed the ladder of economic success knows, expenses quickly rise to meet the income available.
People who can afford a bigger house generally contact a realtor. Those who can afford a fancier car are soon shopping at their local dealership. They also get interested in exotic vacations, fancy watches, expensive boats and so on.
If you can afford these things – and by that, I mean buy them and still save and invest at least 10% of your annual income – good for you.
Go for it. And enjoy.
But if these things are a stretch, if like 78% of Americans you are living paycheck to paycheck, you are sacrificing your future standard of living for today’s consumption.
And that’s not smart.
I won’t dwell on this point. Folks like Dave Ramsey and Suze Orman already own this space.
They regularly browbeat their listeners for driving late-model cars, eating out too often and buying a lot of stuff they really don’t need.
Their advice is sensible. But it’s not my beat.
My mission is showing people who are willing to work and save how to put their money to work to achieve their financial goals and live the kind of lives they’ve dreamed about.
(Even if that includes driving a Mercedes-Benz, dining regularly at Le Cirque or buying whatever the heck you want.)
The two other factors that stop half of Americans from investing in stocks are lack of knowledge and fear.
The two are closely intertwined.
The more you understand about the nature of the market, the power of diversification and the probability of high future returns, the less scary fluctuating share prices become.
For now, let’s return to the fact that the affluent own 90% of the outstanding shares of American companies.
Is this because they have greedily gobbled them up for themselves, preventing everyone else from getting in on the action?
Of course not.
Anyone with a few dollars to invest can buy shares in virtually any publicly traded company. (I say virtually because, yes, it does take a few hundred dollars to buy, say, Apple or Netflix, or a few thousand dollars to buy Amazon or Berkshire Hathaway.)
And there has never been a better time to be an equity investor.
I’m not talking now about the strength of the economy, the low level of interest rates or the outlook for corporate profits.
I’m talking about the fact that it has never been easier for small investors to gain access to the market.
Investment choices have never been greater. Commissions and management fees have never been lower. Trade executions have never been faster. (They are now measured in microseconds.) Information has never been more accessible – thanks to the internet – and monitoring your portfolio has never been easier.
Heck, Fidelity Investments even offers stock mutual funds with no commissions, no annual fees and no investment minimum.
This belies the claim that “the little guy doesn’t have a chance” and removes just about any excuse a man or woman could have for not investing in stocks. (Provided – again – that they are willing to work and save.)
Yet too many individuals still lack the knowledge and expertise to invest successfully and are understandably afraid they will make a hash of things, taking them further from – rather than closer to – their financial goals.
I’ll tackle that important issue in my next column.