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Stock Answer

Marc Bisbal Arias  |  April 21, 2021

ROUGHLY HALF of Americans don’t invest in the stock market. Why not?

According to a JPMorgan Chase survey, 42% say they don’t have enough money, with 63% believing you need at least $1,000 to start investing. But in fact, some financial firms have no required minimum, including the mutual funds offered by Fidelity Investments and Charles Schwab.

No doubt a lack of financial literacy also plays a role. The S&P Ratings Services Global Financial Literacy Survey asked folks around the world about notions like diversification, compound interest and borrowing costs. The survey found that just 57% of U.S. adults were financially literate. If folks don’t understand the basics of personal finance, maybe it’s no surprise they don’t invest in stocks.

A higher salary and more education also help to boost stock market participation. Gallup research found that investing in stocks is correlated with household income and amount of formal education. Unsurprisingly, a high percentage of those with a college or postgraduate degree invest in stocks. Similarly, 84% of those with household incomes of at least $100,000 own stocks, compared with 65% of those with incomes between $40,000 and $100,000. Owning stocks is also most prevalent among those ages 50 to 64.

According to Gallup, owning stocks “was more common from 2001 to 2008, when an average 62% of U.S. adults said they owned stock—but it fell after the 2007-09 recession and has not fully rebounded.” It’s easy to understand why. If you lost confidence in the financial markets during the Great Recession or saw your savings wiped out, it would be tough to own stocks. People won’t put their hard-earned money into a system they fear or don’t trust.

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How can we get the uninvested to buy stocks or, preferably, stock funds? It isn’t an easy problem to fix—but it is important, because the consequences of not investing are enormous. One of the most common regrets among retirees is not saving more, according to a Global Atlantic survey. To avoid that fate, we need to start saving early in our career—and to put those savings in the stock market.

Investing brings with it the risk of market crashes, but not doing so can be far riskier—because it leaves you exposed to inflation. Inflation’s short-term impact is small, but as it compounds over the years, the effect snowballs. The spending power of a $100,000 cash balance shrinks to $67,300 at 2% inflation over 20 years. That’s a 33% drop. Compare that with this: From 1926 to 2015, there hasn’t been a single negative 20-year stretch for the S&P 500 stocks. In fact, notes blogger Ben Carlson, “The worst total return over a 20-year period was 54%.”

The good news is, investing in the stock market has never been easier. To get started, you might take a small amount of your net worth and buy a target-date fund. That’ll give you a diversified portfolio that’s automatically rebalanced. Another option is the classic three-fund portfolio consisting of total market index funds, one focused on U.S. stocks, one on foreign stocks and one on bonds. Once you’ve bought your fund or funds, the next step is to dollar-cost average, so you buy more fund shares on a regular basis. Investing doesn’t have to be much more complicated than that.

Marc Bisbal Arias holds a bachelor’s degree in business and economics. Marc started his professional career at Morningstar, performing research and editorial tasks. He currently lives in Barcelona, Spain, where he spends his spare time trying to understand the financial markets and human behavior, as well as reading nonfiction, listening to podcasts and watching TV shows. Follow Marc on Twitter @BAMarc and check out his earlier articles.

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An
An
26 days ago

Often skipped over is the need to developing the self disipline to control one’s spending. Until one get that under control, investment education will mean very little.

Mr Moderate
Mr Moderate
26 days ago

Well-spoken article. Thank-you.

Marc Bisbal Arias
Marc Bisbal Arias
26 days ago
Reply to  Mr Moderate

Thank you.

Mik Cajon
Mik Cajon
26 days ago

“Historical data is no guarantee of future results”

Guest
Guest
27 days ago

The first step, after parents help children learn the most basic concepts of money, saving, etc is a (or some) required personal finance course(s) in high school and college. When I ask our school administrators about this it’s always “We just don’t have room in the curriculum for that”. Very frustrating. My kids learned the basics early and I also taught an after school program on investing (through SIFMA) for 8th graders at my kids school. The students ate it right up. Start learning early so you can start investing early.

parkslope
parkslope
26 days ago
Reply to  Guest

As a former management professor, I find it frustrating that most finance departments give scant attention to index funds. Because they are training many of their students to be financial advisors the emphasis is on putting together portfolios and other concepts that will help them find jobs in the financial services industry. My presence at presentations by the investment club wasn’t appreciated because I would also ask why they weren’t comparing their stock picks to the S&P. It is discouraging to think that finance courses may make business school graduates less likely to see the wisdom of investing in index funds that their non-business school counterparts.

R Quinn
R Quinn
27 days ago

Nice article, but a sad story. All you mention is true of course, but I think there is more. Too many people are incapable or indifferent to thinking and acting long term. They seek instant gratification and accumulation of stuff over their own future needs. They don’t invest in part because they don’t save.

I have a friend who, long retired, ran a successful business for decades. I recall a conversation we had several years ago that touched on investing and the stock market. He cut it short saying I never had time to bother with that stuff. He didn’t even set up a retirement plan through the business, but he spent money generously. Today, he complains about not having money while he lives off SS and what he can eke out of the old business now run by relatives.

I always wondered what the conservation was like between him and his accountant who must have brought up the topic of setting up a retirement plan through the business.

Marc Bisbal Arias
Marc Bisbal Arias
26 days ago
Reply to  R Quinn

Thanks for your comment Richard.

I completely agree a big problem is about people not saving despite being able to do so. And how can they invest if they don’t save first?

A sad story, indeed.

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