Black People: Investing Fears

Black Americans have historically been excluded from wealth-generating opportunities, which has resulted in a racial wealth gap. Only 36% of African-American adults have investments in stocks, compared to 54% of American adults overall. This disparity is due to various factors, including a history of discrimination, psychological barriers, and a lack of exposure to the stock market from a young age. Additionally, the white-dominated world of financial advisors and investment experts can feel unwelcoming to people of colour. Black Americans have also traditionally favoured real estate and no-risk savings accounts over stocks, reflecting a higher risk aversion.

Historical discrimination and wealth inequality

Black Americans have historically been denied the same opportunities to build wealth as their white counterparts. This includes access to the same investment opportunities, affordable credit, and housing. For example, Black households are less likely to own their homes, and their houses appreciate less in value than those of white households. This is due in part to a well-documented history of mortgage market discrimination.

Black Americans also have less access to stable jobs with good benefits, which are more common in the public sector than in the private sector. They are more likely to be steered towards less secure, lower-paying occupations with fewer benefits and career advancement opportunities. This is especially prevalent in the private sector.

Additionally, Black Americans have faced barriers to education, healthcare, and the criminal justice system, all of which contribute to the wealth gap. For example, Black students are more likely to attend for-profit colleges and are more likely to default on their student loans. They are also more likely to experience negative income shocks and are less likely to have access to emergency savings, making them more vulnerable to economic insecurity.

The cumulative effect of these obstacles has made it nearly impossible for Black Americans to catch up to their white counterparts in terms of wealth.

Lack of representation in the financial industry

The financial services sector shows a severe lack of representation of people of colour, especially at senior levels. At the entry level of US financial services firms, the proportion of people of colour is around 40%, but this steadily declines as we move up the corporate ladder. By the C-suite, the number has dropped by 75%, with nine out of ten people at this level being white.

Women of colour are the worst off. The proportion of white men in the C-suite is 112% higher than at the entry level, but this number is 90% lower for women of colour.

Black employees are 1.4 times more likely than white people to leave a financial services firm at the entry level. This has a huge impact on overall representation. Attrition rates flatten out at the vice president level, except for Asian employees, where attrition remains high.

Black people are also about half as likely to be promoted to manager, senior manager, or senior vice president.

Microaggressions, defined as small acts of racism that signal disrespect and a lack of belonging, also contribute to negative experiences in the workplace. Black men are the most affected by this.

People of colour who are the "only" in the room, meaning they are the only person of their racial or ethnic group, consistently report higher levels of perceived discrimination. They are also more likely to believe that they have missed out on opportunities due to their race.

Financial inclusion for Black communities is key to addressing these disparities. Financial inclusion is when "individuals and businesses have access to useful and affordable financial products and services that meet their needs—transactions, payments, savings, credit, and insurance—delivered in a responsible and sustainable way."

Greater inclusion of Black Americans in the financial system would benefit the entire economy. Black families would have more opportunities to reinvest and grow their wealth, and financial services companies could realise up to $60 billion in additional revenue from Black customers each year.

• Root out geographic, process, and economic barriers that make it harder for Black families to access financial products and services.
• Identify and support initiatives such as student loan reform and innovative systems that support multidimensional credit scoring.
• Monitor and enforce equity in policies related to financial inclusion, such as ensuring real estate agents do not discriminate against Black families.
• Increase diversity in financial services institutions to create conditions that lead to products that serve Black families and reverse feelings of mistrust among Black customers.
• Embrace alternatives to conventional credit scoring that could expand access to credit for Black customers, such as behavioural economics-based assessments and lending circles.

Risk aversion

In economics and finance, risk-averse individuals tend to prefer outcomes with low uncertainty to those with high uncertainty, even if the average outcome of the latter is equal to or higher in monetary value. For example, a risk-averse investor might choose to put their money into a bank account with a low but guaranteed interest rate, rather than into a stock that may have high expected returns but also involves a chance of losing value.

In the brain, risk aversion is associated with the amygdala and the anterior cingulate cortex (ACC). The amygdala plays a key role in the processing of emotions, including fear and anger, and is involved in forming and storing memories for emotional events. The ACC, on the other hand, is believed to act as a "neural alarm system or conflict monitor" that is sensitive to experiences of social pain when social exclusion occurs.

Lack of financial education

Financial education is a critical component of an individual's economic empowerment and can help to address the racial wealth gap. However, historical and systemic barriers have limited access to financial knowledge and resources for Black Americans, contributing to a lack of financial literacy in their communities. This, in turn, affects their ability to make informed investment decisions and build intergenerational wealth.

One significant factor is the exclusion of Black Americans from the traditional financial industry, which has been predominantly white and male. The financial sector, including stockbrokers and investment advisors, has often been an unwelcoming space for people of color, creating a barrier to entry and deterring potential Black investors. This exclusion is not limited to investors but extends to financial advisors and experts as well, with minority representation remaining low in these professions.

Additionally, the education system has fallen short in providing financial literacy to Black students. Inadequate financial education in schools means that young Black individuals are not equipped with the knowledge and skills necessary to make informed financial decisions as they enter adulthood. This lack of financial literacy can lead to a cycle of financial insecurity and limited opportunities for wealth creation.

Furthermore, the legacy of discriminatory policies and practices, such as redlining and restrictive covenants, has hindered Black Americans' ability to build wealth through homeownership and access to credit. Historical injustices, including the seizure and destruction of Black-owned property, have also contributed to the wealth gap and the reluctance of Black communities to invest in certain assets.

To address these issues, comprehensive solutions are needed, including policy changes and increased access to financial education and resources. By promoting financial literacy within Black communities and creating a more inclusive financial industry, individuals can make more informed investment decisions and build long-term wealth.

In conclusion, the lack of financial education among Black Americans is a critical issue that needs to be addressed to empower individuals and narrow the racial wealth gap. Efforts to increase financial literacy, coupled with a more inclusive and accessible financial industry, can help Black individuals and communities make informed investment decisions and build a more secure economic future.

Distrust in the stock market

The stock market has historically been a predominantly white, male space, and this has contributed to a sense of distrust among Black people. This is partly due to a history of discrimination and the psychological hurdles carried by Black culture. The financial industry was once an exclusive community, and the stock market can still feel like foreign turf for many Black people. The environment in which someone might consider investing can be discriminatory, and the lack of diversity in the world of financial advisors and investment and banking experts can be off-putting.

The racial wealth gap is a significant factor in this distrust. Based on data from the Federal Reserve's Survey of Consumer Finance, the typical Black family has only 10 cents for every dollar held by the typical white family. This gap is partly due to a long history of government policies that facilitated wealth for white Americans but not for Black people. For example, the Land Act of 1785 sought to transfer wealth to citizens on favourable terms – but only if they were white men. Similarly, the 1866 Homestead Act, which sought to include Black people in the transfer of public lands to private farmers, was doomed by discrimination and poor implementation.

Furthermore, Black people have often been excluded from wealth-generating benefits. For example, Black people were largely excluded from the New Deal and World War II public policies, which were responsible for the asset creation of the white American middle class. GI benefits in education, employment, entrepreneurship and housing assistance were also distributed overwhelmingly towards whites.

The racial wealth gap and the historical exclusion of Black people from the financial industry have likely contributed to a sense of distrust in the stock market among Black people. This is reflected in the statistics: according to a 2017 market research report, about 67% of African Americans with incomes of at least $50,000 have money invested in stocks or stock mutual funds, compared to 86% of whites at the same income level.

To address this distrust, it is important to recognise the historical and structural barriers that have excluded Black people from the financial industry. Efforts to increase diversity and inclusion in the financial industry, and to address the racial wealth gap, could help to build trust and encourage greater participation in the stock market among Black people.

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