Black Investors Increase Saving and Investing, But Also Risk

Despite a significant rise in saving and investing among Black investors in the US since 2020 that has narrowed the racial gap slightly, only 58% of Black Americans own stocks, down from a peak of 74% 20 years ago, according to the 2022 Ariel-Schwab Black Investor Survey.

Stock market participation has also dropped sharply among white Americans, the survey found, with 63% of white Americans owning stocks, down from 71% in 2020 and a high of 86% in 2015. However, stock market participation among younger Black Americans is higher, with 68% of Black respondents younger than 40 actively investing, compared with 57% of white investors under 40.

The survey also found a 40% increase in money saved or invested by Black Americans to as much as $657 per month on average, from $393 in 2020. But the increase, which was driven by new investors, high earners, and investors under 40, was still well behind white Americans, who are saving and investing up to $857 per month.

According to a report on the survey’s findings from Ariel Investments and Charles Schwab, Black Americans’ attitude toward riskier investments such as cryptocurrencies evinced a lack of financial education. The survey found that 25% of Black Americans currently own cryptocurrency, compared with only 15% of white Americans. Black investors are less likely than white investors to think that cryptocurrencies are risky (68% vs. 73%), and are more likely than white investors to believe that cryptocurrencies are safe (33% vs. 18%) and regulated by the government (30% vs. 14%).

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“The confluence of low stock market participation, appetite for risky investment options, and alarming lack of knowledge about fundamental investing principles is a red flag about the critical need for greater investor education,” Mellody Hobson, co-CEO and President of Ariel Investments, said in a statement. “Many new and younger investors have never experienced market volatility like we’ve seen in the last couple years, and we have a responsibility to educate these new investors about the value of long-term investing to build wealth and achieve financial security.” [Source]

The report also says that Black Americans are less trusting of the stock market and financial institutions than white Americans are, which has led to many Black investors pulling out of the market.

“Since 2020, Black Americans who either have stopped investing or have never invested increasingly cite lack of trust in the stock market (36% vs. 29%), lack of trust in financial institutions (25% vs. 19%), and having had a bad investing experience (15% vs. 9%) as the reason,” says the report.

The survey also found that Black investors are more concerned about losing money than white investors: 56% of Black respondents cited the fear, compared with 46% of white investors. And Black Americans who are not invested are more likely than white Americans to cite a need to access to their money, excessive fees, and high stock prices as reasons not to invest.

The online survey was conducted by Helical Research among 2,057 Americans ages 18 and older with $50,000 or more household income in 2021. The average household income of Black and white participants was $99,000 and $106,000, respectively.

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Tags: ariel investments, Ariel-Schwab, Black Investor Survey, Cryptocurrency, Mellody Hobson, wealth gap

After the series of market debacles that have beset this century, the common wisdom—backed by academic research—is that low-volatility stocks tend to do better over time than the high-tempo kind. After all, shares whose trading activity is steady are by definition less risky than those that shoot all over the place.

But a Northern Trust Asset Management research paper sounds a warning note about low-vol names. Some of these steady Eddies can lead investors astray, particularly in real estate, utilities, and consumer staples, the firm says. Note that these are customarily labeled defensive sectors.

High volatility has been the stock market’s lot this year, as the S&P 500 slumped 10.4%. The CBOE Volatility Index, or VIX, is at 28 as of Friday; in early March, it had shot up to 36. The VIX is usually in the high teens.

The undergirding thesis supporting low-vol stocks is reassuring. They outperformed the market (the MSCI Word Index) and high-vol equities by 0.8% and 2.1% annually, from 1996 through 2021, NTAM finds. This is in keeping with numerous academic studies that found the steady cash flows and price expectations, among other attributes, lead to better performance over time. A well-known study by economist Pim van Vliet, of Robeco Investment Management, backs up that notion.

The problem, in NTAM’s eyes, is that the reassuring low-vol narrative can lull investors into traps. Interest rates, now on the upswing, can do damage to low-vol holdings, says Mike Hunstad, NTAM’s head of quantitative strategies.
Real estate and utilities carry a lot of debt, and the escalating cost of borrowing can harm them, he says. Consumer staples are vulnerable to economic risk, Hunstad adds. While usually regarded as recession-proof, the staples can still take a hit on lower revenue and earnings.

The remedy, according to Hunstad, is to focus on companies with strong cash flows, profitability, and balance sheets. “You want high-quality stocks,” he says.

Indeed, Northern Trust manages an exchange-traded fund called FlexShares US Quality Low Vol that focuses on just these types of stocks. The ETF is down 5.7% in 2022, about half the S&P 500’s drop, per Morningstar. Its beta, of 0.99, indicates that it is slightly less volatile than the market.

Its top three holdings are two tech giants and a pharma megalith: Microsoft and Apple, which are down this year worse than the market, but over five years have more than quadrupled, and Johnson & Johnson, which is up 5.8% in 2022 and over five years has advanced by a half.

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Tags: and consumer staples, low-volatility stocks, Mike Hunstad, Northern Trust Asset Management, Real Estate, utilities, VIX