Tip from the Rich: Don’t Tie Up Money in a Home

If you ask most middle class people what’s the best way to grow money, many will tell you it’s through homeownership — particularly when it comes to passing on generational wealth. There are countless reports and surveys blaming the wealth gap between Blacks and Whites on low homeownership levels in the Black Community.

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Recent research, however, shows that when it comes to wealth building, different saving and investment habits between the classes may be worth a closer look. The rich only keep a fraction of their wealth in their homes, while the middle class have the bulk of theirs tied up in residential real estate.

That’s among the findings of a study released by New York University economist Edward Wolff. In analysis of data from the Federal Reserve’s Survey of Consumer Finances, Wolff found that the wealthiest 1% of Americans have only 9% of their gross assets in their personal residences, while nearly 30% is invested in financial securities like stocks and mutual funds. The rest is in business equity and other real estate investments.  In contrast, the study found that the middle class have nearly two-thirds of their wealth in their residences.

Further down the wealth chain, a TIAA Creff study called the Affluent Investor Barometer had similar findings: 63% of survey participants with at least $250,000 in investable assets say stocks offer the most opportunity to grow their wealth, with real estate a distant second at 12%.

Shelly-Ann Eweka, a Certified Financial Planner with TIAA-CREF, says one of the reasons the wealthy have a different portfolio mix is because they tend to work with financial advisors.  The Creff survey also found that 60% of affluent investors use an adviser compared with 39% of the general population.

“Financial advisors will recommend that their clients maintain a diverse portfolio in addition to home ownership. Financial advisers will work with their clients to make sure their portfolio is well diversified which includes several asset classes – stocks, bonds, guaranteed, real estate and cash,” says Eweka.

Changing attitudes about where to park wealth can be challenging for Blacks due to long-standing conditioning and experiences that equate homeownership with wealth and success.

Owning land is what many of our forefathers experienced as a way to gain wealth. Also, the Black community understands homeownership. The stock market is often misunderstood and therefore some Blacks are hesitant to put their savings in stocks,” says Eweka.

She adds that the most important part of portfolio planning is the ability to keep your eye on the prize. “Yes, we should focus on portfolio diversification for wealth building. This is not to say that real estate and entrepreneurship do not produce great wealth for individuals. You want to make sure that you are well diversified when deciding on how to invest your assets to meet your financial goals.”