You've heard me talk about the importance of getting more people invested in the stock market before, but to me it can't be overstated. And the earlier people start, the better. Einstein has famously declared compound growth to be the 8th wonder of the world, but to benefit you have to get—and stay—invested. Then you not only have the chance to participate in the dynamism and drive of businesses that make our economy thrive, but you also have the chance to build your own wealth and financial security.
Because I believe so strongly that investing can open doors to greater financial opportunities, I was heartened but also concerned by the results of the latest Ariel-Schwab Black Investor Survey on Black middle-class investors.
On the positive side, the gap in stock market participation between Black and white investors has narrowed and Black investors are saving and investing more in 2022 than they did in 2020, largely driven by people under 40. But there are some trends that show we still have a way to go in helping people prepare themselves to take full advantage of the opportunities investing can provide.
Here’s my take on the key findings:
1. A little knowledge can be a dangerous thing
Among both Black and white Americans, more than four in ten admitted to investing in something they didn't fully understand. And Black investors are more than twice as likely to trust social media as an information source on investing than white investors (13% vs. 6%).
Even more concerning, risky investments like cryptocurrency are increasingly popular, particularly with younger Black investors, with nearly a third of Black investors believing that crypto is regulated by the government—which is not the case. With the potential for financial loss and volatility, anyone interested in cryptocurrency should approach it as a speculative investment, best suited to someone who already has a diversified portfolio and a long-term investment plan.
The jury may still be out on the role crypto can play in your portfolio, but if you ask me, the verdict is in regarding the dangers of FOMO, social media and financial illiteracy. Clearly more needs to be done to help people get the financial knowledge and develop the skills to confidently identify facts, decide what information sources are reliable, and understand how to compare choices and assess risks.
2. Return expectations are unrealistic
Hand-in-hand with the appetite for risky investments is the desire to "get rich quick" through investing. When asked about anticipated investment returns, more than one in four Black investors (27%) expect annualized returns of 20% or higher, compared to only 12% of white investors. Black investors under 40 have even higher expectations, with 34% expecting returns of more than 20%, compared to 15% among white investors of the same age. In contrast, analysts at Charles Schwab Investment Advisory project U.S. large company stocks to return an average of 6.4% annually over the next 10 years. International large company stocks are estimated to return slightly better at 7.5% over the same time period.
3. Trust is still an issue
Black investors cite a lack of trust in the stock market and financial institutions as a reason for not investing. On the plus side, Black investors who do engage with financial institutions say they feel more respected now than in the past. Even so, Black Americans report a lower likelihood than white Americans to rely on financial advisors with 51% doing so in 2022 compared to 58% in 2020. In general, Black investors are less trusting of people and more trusting of technology.
4. Investing with your values is important
Investing using an additional lens of Environment, Social, and Governance (ESG) or Socially Responsible Investing (SRI)— in effect, doing well by doing good—is increasingly popular for Black and white investors. And as in 2020, Black investors are even more interested than their white counterparts in aligning their investments with their personal beliefs, with 44% vs. 29% saying it's very important.
One of the things I personally like about investing according to your values is that it makes investing more "real." As a result, individuals may be more likely to stay engaged with their investments. I'm particularly excited by the expansion of thematic investing through mutual funds, ETFs, and fractional shares that allow individuals to align their investments with their interests and values.
5. Financial literacy is a priority
Both Black and white investors largely agree that increased financial literacy is one of the best ways to help address wealth inequality (83% vs. 74%). An overwhelming majority of respondents—regardless of race—agree that financial literacy should be required in public schools (93% of Black Americans vs. 92% of white Americans). This belief in the importance of financial literacy is reflected in an increase in "dinner table conversations" about investing among both Black and white families.
Why I'm optimistic
As divided as we are on various issues today, I'm probably the most heartened—and optimistic—about this wide agreement that financial literacy needs to be a priority. I've always believed financial literacy is an essential life skill that should start at home, continue through school and at work and never stop. And I see it happening in many areas of society.
According to our survey, more families are discussing money at home today than in the past. Nearly half of all states now require high school students to take a course in personal finance to graduate. More employers than ever are offering financial education as part of workplace benefits. And it's through this increased focus on financial literacy that I believe we can counter some of the misinformation and unrealistic expectations about investing that still exist.
I think the survey shows that our industry has a lot more to do to help more people get invested and stay invested, particularly new investors, those with low wealth, or systemically disenfranchised individuals and communities. But working together with schools, employers, nonprofits and regulatory bodies, we can do it. Just imagine—greater financial security through increased financial literacy and more people benefiting from markets and the economy. Now that would get my vote for the 9th wonder of the world!
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