Thu, 25 February 2021 | investing demographics
The results of the 2020 Ariel-Schwab Black Investor Survey reveal that Black Americans are not benefitting from stock market growth at the same rate as white Americans at similar income levels. The deep-rooted gap in participation between the groups persists, with 55 percent of Black Americans and 71 percent of white Americans reporting stock market investments. This disparity, compounded over time, means that middle-class Black Americans will have less money saved for retirement and less wealth to pass onto the next generation than their white peers.
For more than 20 years, the Ariel-Schwab Black Investor Survey has compared attitudes and behaviors on saving and investing among Black and white Americans. African American participation in the stock market stands at its lowest level in the history of the survey. According to Mellody Hobson, co-CEO and President of Ariel Investments, and the driving force behind this study, “Black Americans are already behind the eight ball, and it is disheartening to see that at current savings and investing rates, the wealth gap will continue to expand, endangering our futures and leaving our families exposed.”
In a year like no other, however, there is also evidence of growing engagement in the stock market by younger Black Americans, with 63 percent under the age of 40 now participating in the stock market, equal to their white counterparts. The closing of this gap among younger investors is being driven by new investors: three times as many Black investors as white investors (15% vs. 5%) report having invested in the market for the first time in 2020. Twenty-nine percent of Black investors under the age of 40 were new to investing in 2020 compared to 16 percent of whites.
Rick Wurster, Executive Vice President, Schwab Asset Management Solutions, says, “These findings are encouraging for younger Black investors, but there is much work to be done to ensure that Black Americans have access to the resources they need to stay engaged and successfully investing for the long-term.”
His colleague Carrie Schwab-Pomerantz, President of Charles Schwab Foundation, agrees, “Many Americans are struggling to make ends meet and don’t have access to educational resources and tools that can help them avoid financial pitfalls and get on the right track. Financial literacy is a great equalizer, and a life skill that everyone needs. We have a responsibility to help people develop the knowledge and skills to become financially confident and remain lifelong savers and investors.”
401(k) Plans and Beyond
Over the last several decades, 401(k) plans have become an important gateway to investing for many Black Americans, with 63 percent of Black investors having first invested in the stock market through a retirement plan. Ownership rates of 401(k) plans are now similar between Black and white Americans (53% vs. 55%). But savings rates show meaningful differences. Specifically, white 401(k) plan participants invest 26 percent more per month toward their retirement accounts than Black 401(k) plan participants ($291 vs. $231).
Beyond investing, the survey finds that Black Americans are less likely than white Americans to own almost every kind of financial vehicle, with the exception of whole life insurance, which is favored in the Black community. They are also less likely than white Americans to have written wills, financial plans, or retirement plans.
For Black Americans, disparities grow every month; while they save $393 overall per month, whites are saving 76 percent more, at $693 per month. Even Black Americans who earn more than $100,000 a year consistently save or invest considerably less than their white counterparts at the same income level.
“These differences are not new. Black Americans are disadvantaged from the outset when it comes to building wealth,” says Hobson. She notes that while 51 percent of white Americans say they have inherited wealth, just 23 percent of Black Americans have.
Schwab-Pomerantz points out that more white Americans (44%) than Black Americans (33%) are focused on preparing for retirement as their most important financial goal. “For so many Americans, the 401(k) is the first step to becoming an investor, and while it’s encouraging to see greater parity among those who have access to this opportunity through their workplace, it’s incumbent on employers and all of us in our industry to help 401(k) owners save more throughout their earning years,” she says.
Trust Remains an Issue
Trust in the financial services industry continues to affect stock market participation among Black Americans. While similar proportions of Black and white investors believe that financial services institutions are not trustworthy (23% vs. 20%), only 35 percent of African American investors feel they are treated with respect by financial institutions versus 62 percent for white investors. Additionally, Black Americans are considerably more likely to cite the importance of racial diversity within the employee ranks at investment firms (63% vs 27%).
Black Americans are less likely to work with financial advisors (21% vs. 45% of whites), but Rick Wurster points out that the majority of Black investors who do work with a financial advisor say they feel like they are treated with respect by financial institutions, and he believes that encouraging these relationships will lead to positive change. “I believe this is a clear call to action for our industry that these partnerships should be nourished, because they can be truly impactful,” he says.
Belts Tightened but Optimism Prevails
The pandemic, not surprisingly, affected Black and white Americans in different ways financially. While both groups report a sharply increased focus on saving for emergencies compared to prior years, the pandemic’s impact on the economy caused Black Americans to take action in greater numbers than white Americans.
Black Americans were more likely to cut spending on both extras (50% vs. 41%) and basics (19% vs. 13%). Student loan delay or deferral was reported as being three times more common among Black Americans (16%) than whites (5%).
Despite this, a sizable minority of Black Americans – and significantly more than white Americans – were forced to tap their savings to make ends meet. More than twice as many Black 401(k) plan participants (12% vs. 5%) borrowed money from their retirement accounts. Almost twice as many Black Americans (18% vs. 10%) dipped into an emergency fund. And nine percent of Black Americans (vs. 4% of white Americans) say they asked their family or friends for financial support in 2020, while 18 percent of Black Americans and 13 percent of white Americans acknowledged giving financial support to family and friends last year.
Hobson emphasizes, “The pandemic has further exposed fault lines between the fortunes of middle-class Black and white Americans.” She notes although real problems persist, Black Americans remain eternally optimistic: when asked to forecast their personal financial situation in 2021 compared to 2020, 60 percent of Black Americans say they feel their situations will improve, compared to only 40 percent of white Americans who felt the same way.
Source: Charles Schwab/Ariel Investments