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.
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.