Rate of Stock Ownership Among Blacks Drops Despite Previous Growth

Experts encourage educated investing in tough economy

0311_weablackinvestorsRecent economic woes and a slump in the stock market may contribute to an already lagging number of African American stock owners, according to research released by Ohio State University in February.

Though black investment rates have historically trailed whites, the rate of stock ownership by blacks increased to 34% in 2001, up more than 17% from 1992. Those gains have since diminished 12% between 2001 and 2004, according to the study, “The Decrease in Stock Ownership by Minority Households,” which looks at individual stocks and those within a 401(k) and IRA.

“It may be that white investors are more experienced with the stock market, so they are prepared for the inevitable drops,” says Hanna Sherman, a financial planning professor at Ohio State University, referring to the 2001 recession, which scared off many black investors.

The rate of stock ownership among white households increased from 1992 to 2001, topping off at 57.5%.  Unlike minority investors, their investment rate dropped less than a percentage point between 2001 and 2004. What’s more, even after equaling out traditionally higher income levels of whites to that of blacks, whites still invest more than African-Americans.

What’s most startling about the survey are the implications for African American’s ability to create and retain wealth. “If you look at high wealth households of all racial or ethnic groups, they tend to either have a lot of stock investments, their own business, or substantial real estate investments, and many of them have all three,” Sherman says. “It’s very uncommon for people to build wealth unless they have one or more of those three types of investments.”

Hanna conducted the analysis using the Federal Reserve’s triennial “Survey of Consumer Finances”  study which recorded data from 4,000 U.S. households. Though the data reflects the Fed’s 2004 report, the most recent survey at the time, modest gains made in the 2007 survey are unlikely to remain constant given the economic climate. “Based on past patterns, I would suspect that bad economic conditions would probably leave a lot of minority households out of market,” Sherman says.

And according to the 11th annual Ariel/Schwab Black Investor Survey, African Americans are on equal footing with whites when it comes to accessing and enrolling in employer-sponsored defined contribution plans, but save far less each month and have a considerably smaller nest egg than their white counterparts.

The Ariel/Schwab survey found that 62% of higher income blacks own stocks or mutual funds compared with 82% of whites.

“My intuition on that is the lack of experience [of blacks],” Sherman says. “When you’re growing up in terms of people you talk to in church, or the neighborhood, you’re less likely to invest in stocks if those people don’t invest. There’s probably been limited marketing by financial companies to African Americans too,” he adds.

But with millions of Americans abuzz about record high stock prices and the instant millionaires of the dotcom boom, African Americans wasted no time getting in on the action, possibly

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