Why a Crisis Can Be Good for Your Finances

Ariel Investments 2010 survey of African American investors reveals surprising new post-recession money trends

As I read over the results of Ariel Investments 2010 Black Investor Survey recently, I recalled Rahm Emanuel’s statement following the 2008 presidential election:  “Never allow a crisis to go to waste.”

Those who found Emanuel’s statement controversial probably misinterpreted it. A crisis isn’t simply any big, bad event. The word crisis comes from the Greek word meaning “decision.” A crisis occurs at a breaking point that requires some urgent, usually drastic change. Not supplying the needed change is letting the crisis go to waste. To recognize the wake-up call—to decide to act differently—is the more effectual path. I think that’s what we’re doing in the wake of the recent financial crisis. As the data came in this year, it spoke volumes about how members of our community learned good lessons from the crisis, and thus we aren’t letting it go to waste.

Many of us had to make tough choices in the downturn. Half of the African Americans surveyed thought the Great Recession was tougher on minorities, and the evidence supports that perception. The unemployment rate for us has been considerably higher than the overall rate. Since April 2009, African American unemployment has hovered around 15%, with the overall rate peaking at just more than 10%. That meant tough choices. Nearly half of us (48%) had to use personal savings to make ends meet versus just 31% of our white counterparts. Additionally, 35% of African Americans in our survey reduced retirement savings, compared to the baseline number of 29%. What’s worse, 22% of our community tapped retirement accounts during the recession. Clearly, in times of economic hardship, people have to make difficult decisions. Unfortunately, these choices have resulted in many of our people slipping even further behind.

We are not, however, letting the crisis go to waste. As those of you who have read my columns know, I have long said stock trumps houses in generating wealth over the long term. Despite reams of data proving that equity returns top real estate returns over the long term, Americans got caught up in the real estate bubble. After that bubble exploded—causing broad and deep damage—we learned the most important lesson possible from the crisis:  For the first time in the 12 years of doing this survey, African Americans preferred stock or stock mutual funds over real estate as the “best investment overall.” It was a painful lesson to learn but we learned it. More important, investing in stock is the best way to build long-term wealth for most Americans, and now our community is prepared to do just that.

Now we’re getting our financial health in order. With news reports continually suggesting that every American consumer is burdened by unsustainable debt, maybe it will surprise you to learn that 83% of African Americans surveyed are not delinquent on any home, auto, or credit card payments. The vast majority of us are in good shape and didn’t get overburdened during the Great Recession. We didn’t let the crisis go to waste: A full 80% of those surveyed have cut back on spending. Saving and investing a reasonable amount, and not spending more than we earn, are keys to a brighter financial future.

Just as important, we are optimistic.  Despite all the gloom-and-doom headlines, African Americans are hopeful about the economy and about our own earning power. A full 75% of survey respondents were positive about the U.S. economy, and 68% thought their own financial situation would improve over the next year. Indeed, recoveries do follow recessions, and as a group we know that. In other words, we are preparing for the possibility of another downturn, even though we look to the future with great hope. Losing hope is debilitating, but remaining hopeful opens up limitless possibilities. From saving toward a rainy-day fund to building solid retirement plans, to winning a presidential election, that is the power of hope.

Mellody Hobson is president of Ariel Investments L.L.C., a Chicago-based money management firm serving individual and institutional investors. She is also a regular contributor to ABC’s Good Morning America.

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  • Liesl

    I’d really like to add this article and a few others to a blog I’m writing about financial management and wealth building but you don’t have a link to attach to blogger. Any chance you might add that option? Thx!

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