One of the fascinating parts about the stock market is that practically everyone with an opinion about it is, more or less, right.
Is it a good way to build wealth? Yes.
Can it ruin fortunes? Also, yes.
Is it a Ponzi scheme? Kind of, in the sense that part of the reason it keeps going up is that there's more money flowing into the markets than out of it.
Are there better options? With the same liquidity and risk levels, there aren't many (if any?) better choices. Unless you pick thinly traded shares, you can usually exit a pedestrian-sized position in seconds. Try that with real estate or any other asset.
Given all that, you'd expect the stock market to be popular and for there to be a lot of participation. But, as you'd also expect, you need discretionary money if you want to invest in the stock market. You have to satisfy the more pressing needs in Maslow's hierarchy before you can put it in an index fund at Vanguard.
So, who do you think owns stock in America?
Our Data Sources
A great source of this information is the Federal Reserve's Survey of Consumer Finances (SCF). The most recent SCF dataset was released for 2016. We use this data when we looked at how millionaires made their money – it contains a lot of juicy information you can't find (reliably) anywhere else.
The relevant section for us has to do with the ownership of financial assets. Financial assets include everything from checking and savings accounts to retirement accounts, life insurance, and other managed assets. We drill down into the section that includes ownership of publicly traded securities.
Only 51.9% of Families Own Stock
When you look at the entire population of the United States, fewer than 52% of families own stock. They can own it through a taxable brokerage account or a retirement account, but only 51.9% own any stock whatsoever.
The telling statistics is how this changes based on your percentile of usual income (Table 7 of the SCF spreadsheet):
- Of the top 10% of income earners, 94.7% own stock.
- Of the 80-89.9% percentile of income, 85.3% own stock.
- Of the 60-79.9% percentile of income, 73.6% own stock.
- Of the 40-59.9% percentile of income, 51.8% own stock.
- Of the 20-39.9% percentile of income, 32.5.6% own stock.
- Of the bottom 19.9% percentile of income, just 11.6% own stock.
As for the median value of those holdings? For all families, the median is $40,000.
The breakdown is:
- Of the top 10% of income earners, the median value is $363,400
- Of the 80-89.9% percentile of income, the median value is $81,200
- Of the 60-79.9% percentile of income, the median value is $32,400
- Of the 40-59.9% percentile of income, the median value is $15,000
- Of the 20-39.9% percentile of income, the median value is $10,000
- Of the bottom 19.9% percentile of income, the median value is $6,000
(recall, the median income in the United States is just $63,179)
This shouldn't be surprising though. When the poverty line for a family of four in the lower 48 is $26,200, that doesn't leave much room for investing in stocks. You're too busy paying for housing, food, clothing, etc.
Most Hold Stock in Retirement Accounts
When it comes to ownership, 87.8% of those who held stock did so in a tax-deferred retirement account like an IRA or 401(k).
Only 26.9% owned individual shares of stock while 18.9% invested in a “pooled investment fund,” such as an index or mutual fund. Lastly, you had managed investment accounts, trusts, and annuities ownership at just 7.3%.
Where Do People Put Their Money?
If so few people own stock, and those that do own stock mostly hold it in retirement accounts, where do people keep their money?
Turns out the answer is not “in their mattress.”
Here's the breakdown of what assets Americans have:
Table 3. Holding and values of assets, 2013 and 2016 surveys
You have to read that table very carefully. The “Percent holding” columns in the table above shows the number of people who have a particular asset – such as a vehicle, home, CD, etc. This isn't a measure of how much of their net worth is in a particular asset. In the columns above, in 2016, 98.5% of Americans have a financial asset of any kind.
The next two grouped columns, Conditional median value and Conditional mean value, explain the amounts in those asset types. In 2016, the Americans had a median of $23,500 in financial assets and $158,900 in nonfinancial assets.
What can we learn from this data?
For financial assets, almost everyone has a transaction account (checking, savings, etc.) and only half of all people have a retirement account. The next biggest category is 19.4% of Americans having a cash value life insurance policy.
The amounts are quite telling.
First, look at the massive difference between the conditional median and conditional mean! In the “Any financial asset” row, the median value is $23,500 whereas the mean value is $340,000! This shows there's a significant concentration in wealth. As the old joke goes, whenever Bill Gates walks into the room, the average person in that room is now a millionaire!
Once you get past that, we find a few items that confirm what we've known from other data sources. Primary residence and residential property make up a significant portion of one's net worth. From our look at average net worth, we know that most Americans have the majority of the net worth locked away in their home.
We also see a slip in the nonfinancial asset category where only 63.7% of Americans own a primary residence. That's down from 65.2% in 2013. Fewer people own homes. This is a trend that is likely to continue as older Americans downsize and younger Americans delay or avoid homeownership.
Another gem? 85.2% own a vehicle, which is the most commonly held nonfinancial asset.
13% of Americans own business equity, which is any privately held business, a rise from 11.7%. More Americans with businesses as starting a business have become increasingly easier and entrepreneurship gains in popularity.
Conclusions
Building wealth is difficult but it's made harder given the financial scenario many young people are in. The SCF also discusses other areas of American's financial lives and one such area is debt and debt burden. Overall debt obligations decreased from 2013 to 2016 with one exception – education debt (yes, student loans). That exploded.
Median debt declined by 4% in those three years but the median value of education loans rose by 15% (from $16,500 to $19,000). The mean value rose 15% too, from $29,800 to $34,200. The share of families with education loans also increased from 20% to 22.4%. If you look at the outstanding student loans, courtesy of the St. Louis Fed, we're looking at a total of over $1.636 trillion (as of January 8th, 2020).
We see this in our low rates of stock ownership, decreasing rates of homeownership, and other social measures like when people choose to get married, start a family, etc. These traditional milestones are being delayed for a variety of reasons but when it comes to the financial ones, it's hard to invest when you are carrying around an education debt. That's likely why we see high rates of retirement assets but relatively lower rates for non-retirement investments.
This also means that when we conflate the economy with the stock market, only half of all Americans participate. The stock market might be hitting record levels but for half of Americans, it doesn't matter. For the other half, many likely have such low levels of market holdings that it won't have an impact even given the rise.
We see this in the data in several places. If you look at the before-tax family income, distributed by income sources, by percentile of net worth, we see the following breakdown:
Amount of before-tax family income, distributed by income sources, by percentile of net worth, 2016 surveys
Of the bottom 75% of Americans, less than 1% of their income was derived from interest, dividends, or capital gains. Compare that to the top 10%, where 18.5% of their income came from interest, dividends, and capital gains!
When the stock market goes up, 75% of the Americans don't participate in any meaningful way.
wow
It’s unfortunate that nearly half the nation doesn’t benefit from stock ownership, but what’s even more surprising to me is the fact that participation in cash value life insurance is actually increasing.
Shows the power of salesmanship, I guess.
Best,
-PoF
It certainly does show the power of salesmanship – a lot of times people go into those sales situations not knowing the landscape and what’s available. They think that the person in front of them is an expert (and a fiduciary) so they believe that they say at face value.
With the rise of crowdfunding platforms to invest in real estate, which is really a paper asset than real property, I wonder how statistics will change going forward. Aside from not having capital to invest in stocks of companies, i think people are intimidated by it and also feel a lack of control. Some of these things may be helped when real estate is the underlying investment. It’s too soon to tell, but there are so many more investment options now with the fintech boom, and people are waking up to having to take a more active role in their retirement planning, so statistics over the next 5, 10 or 15 years may be quite different.
What I would love to know is how many of these people who own no stocks are making low-quality decisions and blowing their money on things like $50,000 cars with financing versus how many of them are just facing difficult economic circumstances. It’s not something that anybody ever addresses because this would acknowledge that people are to some degree responsible for their financial situation.
While that’s an interesting distinction, I’d argue that it doesn’t really matter unless someone is advocating that you give those individuals (either category) money to invest. You can only incentivize it (with deductions, credits, etc.) and the ones who are wise will do it.
There’s some great data here Jim. That 20% own a cash value policy is astounding. Fewer than 1% of the population could actually benefit from one. Shows the power of commissioned salespeople!
Hopefully the trend of stock ownership increases. My younger siblings just got new jobs and employers actually make it pretty simple to invest in retirement accounts. I told them both to contribute up to the match and just invest in a target date fund for now since they’re starting out. Luckily they both listened!
I think a lot of people grow up thinking there are experts and you put a salesperson dressed up as a “financial professional” and they buy whatever that person is selling.
I hope it increases too – it’s hard when we just had the Great Recession (10 years ago but still fresh in people’s memory) on top of already dismal savings rates.
Outstanding Information and surprised me!
Thanks 😀👍👍
You’re welcome!
Hopefully some of these new Apps like Acorn that round up to the next dollar and then invest it will help the next generation get a feel for it but ultimately I think the best tool is parents taking time with their kids to explain it and then model it.
I think of all the comments, Trevor hit it “right-est.” Jim, you write a terrific column with great info and I will bet that most of your readers are like those who commented here, people who “get it” and realize that they have to, and have the opportunity to build wealth during their working lives and spend a fair amount of thought and some worry about the issue.
I suggest that most of those people who don’t get it/worry also don’t read these columns, instead reading all the things telling them they are going to suffer but without much enlightenment about how to offset it. Plus, most of the of those parents we are talking about from our ivory towers (and I live in one too), never invested, so how can they be expected to encourage and support investment??
In my case I have two nieces whom I do regular “savings/investment/wealth building tips” emails and texts (this column will be one of those in a few minutes) and regularly advocate for saving and (again from my ivory tower) provide occasional small incentives to save and soon to invest as amounts rise. But that is NOT scale-able.
My question is who is encouraging good financial management and beyond that, saving and wealth building (at any level for that matter) throughout life? Asking a parent who has never saved to teach their kids to save (remember that the average retirement savings account level is $374k and the median is $120k according to The Street), is like hoping that teaching abstinence in sex ed will reduce pregnancies (not to open a firestorm here…). But, like sex ed (again risking losing my audience to a political fire storm), we should make these issues of financial management and savings required courses in high school. THAT is scale-able… Just a thought and one I plan to do a little research on.
Wow, mind blowing post. Thank you!
What gets me is that the conditional median value of financial assets was $23.5K in 2016 while vehicles were $17.3K. Most people’s priorities are our out of wack if you ask me. Yikes.
Well, to be fair, most people in the United States benefit from owning a car because public transportation isn’t as good as it should be. If I take only public transportation to try to get to the local mall, it would take at least an hour and a half or a 20 minute drive.