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:
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.
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:
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.