Americans Taking Control: Investment Decisions And Independence

When it comes to making investment decisions, Americans have a variety of options to consider, including asset classes, risk tolerance, and retirement goals. While some individuals choose to seek professional advice from financial planners, accountants, or lawyers, others rely on their own research and judgement to navigate the complex world of investing. Recent surveys reveal that approximately 62% of U.S. adults own stocks, with the top 1% holding a significant portion of the total stock value. This disparity in stock ownership highlights the wealth inequality in the country. Additionally, stock ownership rates vary across different demographic groups, such as race and generation. Understanding the investment landscape and making informed decisions are crucial for Americans aiming to build their financial portfolios and secure their future.

Investment sources: business professionals, friends/family, advertisements, and the internet

When it comes to making investment decisions, Americans turn to a variety of sources for information and advice. Here is an overview of the key sources: business professionals, friends and family, advertisements, and the internet.

Business Professionals

Business professionals such as financial planners, accountants, and lawyers are the most relied-upon source for investment information. Their popularity has remained stable since 2010. These professionals can provide expert guidance and help individuals make informed decisions about their investments. They can offer personalised advice, taking into account an individual's financial goals, risk tolerance, and current market trends.

Friends and Family

Friends, relatives, and associates have grown in popularity as a source of investment information. Many people value the first-hand experiences and recommendations of their trusted social circle when making financial decisions. This source may be particularly appealing as it provides an opportunity to ask questions and discuss concerns in a more casual and intimate setting.

Advertisements and Media

Traditional advertisements and media sources, such as TV and radio, have seen a decline in popularity as a source of investment information. However, it is important to note that this does not include online advertisements or digital media, which fall under the "internet" category.

The Internet

The internet has been the fastest-growing source of investment information, with usage tripling among families between 2001 and 2019. Within this category, search engines, blogs, and specialist email newsletters are the most popular sources. Social media platforms like Twitter and LinkedIn are also commonly used, with Twitter usage among investors growing significantly since 2014. The internet provides a vast array of information, real-time market updates, and easy access to a diverse range of investment-related content.

In conclusion, while business professionals remain the primary source of investment information for Americans, there is a clear shift towards digital sources, including the internet and social media platforms. Friends and family are also playing an increasingly influential role in investment decision-making.

Stock ownership: demographics, wealth distribution, and racial disparities

Stock ownership in the US is highly concentrated among the wealthiest Americans. While over half of Americans own stocks, they are not distributed equally across the population. According to a recent Gallup survey, about 162 million Americans, or 62% of US adults, own stock. However, the top 1% of households hold 50% of stocks, worth $23 trillion, while the bottom 50% hold only 1% of stocks, worth $480 billion. This disparity has increased in recent decades, with wealth inequality in the US surpassing that of most developed countries, except Switzerland and Denmark.

Wealth Distribution

The concentration of stock ownership among the wealthy is evident when examining the top 10% of households, who hold 87% of stocks, valued at $35.5 trillion. In contrast, the bottom 50% of Americans in terms of net worth own a mere 1% of stocks. This disparity is not limited to stock ownership but extends to overall wealth distribution in the country. Federal Reserve data from Q4 2021 indicates that the top 1% of households held 30.9% of the country's wealth, while the bottom 50% held just 2.6%. The COVID-19 pandemic further exacerbated wealth inequality, with the wealth held by billionaires increasing by 70%.

Demographics

Stock ownership varies across different demographic groups. Baby boomers hold the largest share of stocks, at 54%, valued at $25 trillion. This is not surprising, as they have had more time to build wealth and invest in the stock market. Gen Xers and millennials follow with 21.7% and 7.8% of stock ownership, respectively.

Racial Disparities

Racial disparities in stock ownership are stark, with white Americans owning 89% of stocks, valued at $41.3 trillion. In contrast, Black Americans, who make up 13.8% of the population, own only 0.7% of stocks, worth $310 billion. Hispanic Americans, who constitute 18.9% of the population, own an even smaller share of 0.6% of stocks, valued at $300 billion. The racial breakdown of stock ownership is far from representative of the country's demographic makeup.

These racial disparities in stock ownership contribute to the broader wealth gap between white and non-white households. The wealth gap between white and Black families nearly tripled from $85,000 in 1984 to $236,500 in 2009. As of 2023, the median net worth of white households was $285,000, while that of Black households was $44,900, and Hispanic households had a median net worth of $61,600.

Various factors contribute to the racial wealth gap, including differences in income levels, saving behavior, and access to financial markets. Studies suggest that lower participation in financial markets by minority households may be a significant factor in the wealth disparities. Additionally, differences in portfolio choices and risk tolerance play a role, with minority households less inclined to hold riskier, higher-yielding assets.

Risk tolerance: understanding risk and potential loss

Risk tolerance is a crucial aspect of investment decision-making, as it helps individuals understand the level of risk they are comfortable with and the potential losses they may be willing to accept. It is influenced by various factors, including investment objectives, time horizon, reliance on invested funds, and inherent personality.

When it comes to investment objectives, individuals need to consider the potential for significant growth alongside the risk of significant losses. Those seeking higher returns may opt for riskier investments, while those focused on capital preservation may choose lower-risk options with potentially lower growth.

The time horizon for an investment also plays a role in risk tolerance. Long-term investments, such as retirement plans, can accommodate more risk as there is a longer timeframe to recover from potential losses. In contrast, short-term investments may require a more conservative approach to minimise the risk of significant decreases in value.

Additionally, individuals should assess their reliance on the invested funds. If the money is intended for essential expenses, such as a home down payment or education, a more conservative approach may be preferable. On the other hand, if the funds are disposable income, investors may be more comfortable taking on higher-risk investments.

Personality traits also influence risk tolerance. Some individuals are naturally more cautious, while others are comfortable taking risks. It is important to strike a balance between one's comfort level and logical investment decisions.

It is worth noting that risk tolerance is unique to each individual and may change over time. It is essential to periodically reassess your risk tolerance and adjust your investment strategies accordingly.

While this discussion provides a general overview of risk tolerance, it is always recommended to consult with a financial professional for personalised advice.

As for how many Americans make their own investment decisions, it is challenging to find an exact figure. However, according to Gallup, about 61% of Americans reported owning stocks as of May 2023. This percentage has been increasing since 2020 and is the highest it has been since 2008. Additionally, a survey by New York Life Investments found that business professionals like financial planners, accountants, and lawyers are the most relied-upon source for investment decisions. Friends, relatives, and associates have also grown in popularity as information sources, and the internet has been the fastest-growing source of investment information.

Investment types: stocks, bonds, cash, and mutual funds

Stocks, bonds, and mutual funds are some of the most common investment types, each offering different benefits and risks.

Stocks

Also called equities, stocks are the cornerstone of most retirement accounts due to their historically strong returns. Stocks represent ownership in a company, and they come in many different forms. They can represent companies of different sizes, from different industries, and from different countries. Stocks are typically categorized by their market capitalization, or "market cap", which is calculated by multiplying the share price by the number of a company's outstanding shares. There are three main types of market cap: large-cap, mid-cap, and small-cap. Large-cap stocks tend to be more established companies, while small-cap stocks are typically newer, riskier investments. Stocks offer higher potential returns than many other investments but come with greater risk.

Bonds

When you buy a bond, you are essentially lending money to a government or corporation. Bonds are considered safer investments than stocks, but the level of risk depends on the specific bond. The riskier the bond, the higher the potential returns. Bonds are given risk ratings by agencies like Standard & Poor's and Moody's, with "junk" status bonds carrying high risk, and "investment grade" bonds carrying little to moderate risk. U.S. government bonds are generally considered the safest, as they are guaranteed by the full faith and credit of the federal government. Bonds mature, or come due, at different time periods, with Treasury bills maturing in about three months, and Treasury bonds maturing over longer periods, usually between five and 30 years.

Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of stocks, bonds, or other securities. They are managed by professional money managers and are designed to give individual investors access to a wide range of assets. Mutual funds are often used for retirement savings, particularly by middle-income Americans, as they provide a way to build a diversified portfolio with limited investment risk. There are many different types of mutual funds, including stock funds, money market funds, bond funds, and target-date funds. Mutual funds charge fees, such as annual fees, expense ratios, or commissions, which reduce overall returns.

Cash

Cash, or cash equivalents, are typically considered a safe investment option, as they are highly liquid and easily accessible. Cash can include money in savings accounts, checking accounts, or money market accounts. While cash investments are generally safe, they often earn lower returns than other types of investments, and the purchasing power of cash can be affected by inflation over time.

Each of these investment types offers different benefits and risks, and many people choose to diversify their portfolios by investing in a combination of these options.

Investment goals: retirement, education, and emergency funds

Retirement, education, and emergency funds are three key investment goals that individuals should consider when planning their financial future. Here are some insights and strategies for each of these important investment objectives:

Retirement Planning:

Retirement planning is crucial for a secure financial future. It's important to start planning as early as possible to give your savings more time to grow. The first step is to determine when you want to retire and how much money you will need to maintain your desired lifestyle. Online retirement calculators can help estimate the savings required to replace a certain percentage of your pre-retirement income.

The next step is to choose the right retirement plan. This could include a 401(k), an employer-sponsored plan, or an Individual Retirement Account (IRA). Consider taking advantage of any employer-matching contributions, as they provide additional savings incentives. It's also essential to select suitable retirement investments, balancing risk and return according to your age and comfort level.

Education Savings:

Education savings plans, such as 529 college savings plans, can help individuals save for future education expenses for themselves or their children. These plans offer tax advantages and can be used to cover qualified education costs, including tuition, fees, and other eligible expenses.

Emergency Funds:

Building an emergency fund is essential to prepare for unexpected financial shocks, such as medical emergencies, home repairs, or job loss. The recommended amount to cover short-term spending shocks is at least half a month's worth of living expenses or $2,000, whichever is greater. For income shocks, experts suggest having enough to cover three to six months' worth of living expenses.

When deciding where to keep your emergency fund, consider accessibility and potential returns. Traditional savings accounts, money market funds, and cash management accounts are suitable for short-term spending shocks, while taxable brokerage accounts or Roth IRAs can be used for longer-term income shock protection, allowing your savings to grow while still providing access if needed.

In conclusion, retirement, education, and emergency funds are vital investment goals that require careful planning and consideration. By setting clear objectives, choosing appropriate investment vehicles, and seeking professional guidance when needed, individuals can work towards achieving their financial goals and building a secure future.

Frequently asked questions