Allison Schrager Bloomberg Opinion
The destruction of wealth in recent weeks has been brutal. Markets are down more than 20% since the start of the year; we are officially in a bear market. One estimate (from last week) indicated that household net worth fell by 0.4%.
A bear market is never good, but this time it’s particularly worrisome because in recent years stock investing has become all the rage, with TikTok stars becoming the new investment gurus. Now many of these new investors are learning that TikTok isn’t the best place to get investment advice.
There are many culprits to blame for the stock market slump, including policy mistakes that contributed to inflation, excessive exuberance, or simply the very human tendency to forget that sometimes risky markets fall. But even in a perfect world, bear markets are a part of life. Stocks offer no guarantee of return and they fall from time to time. “Risk” is the key word in the equity risk premium; that is why they generally yield more than bonds. But what is concerning is that after years of a bull market and a few rounds of government cash payments, some households may be overexposed to risk, holding more stocks than before and in riskier portfolios.
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More Americans than ever own stocks. The main reason is the growing popularity of workplace retirement accounts such as 401(k)s. According to data from the Federal Reserve’s Survey of Consumer Finances, in 2019, 53% of households had some net worth in their portfolio, up from 50% in 2010 and 32% in 1989. The data from the Federal Reserve The survey suggests that stock ownership has increased during the pandemic, but not as much as the phenomenon of meme stocks seemed to imply. The share of Americans owning stocks rose only a few percentage points. A survey by Charles Schwab reveals that their new investors tend to be younger and earn less money than their pre-2020 clients. They also tend to be more optimistic about risky assets.
What may be more worrying is that even among the most experienced investors, portfolios have become riskier. There has been a lot of speculation that time at home, government checks and social media have encouraged more people to trade daily. According to a Fed survey, 34% of Americans own individual stocks and 19% of individual stock owners started trading in the past three years. The survey also reveals that 12% of households own some amount of cryptocurrency.
As the risk increased, most households did not bet the farm on the market. According to the Survey of Consumer Finances, which was last conducted in 2019, equity market exposure has remained relatively stable since the financial crisis, at around 40% of financial assets. But among older Americans who are closest to retirement, equity exposure has increased. Equities account for around 40% of financial assets among people aged 60 and 70, compared to 35% in 2010.
Although the increase in equity exposure is relatively small overall, it remains a concern for several reasons. Falling markets will put many people’s retirement plans on hold or completely out of reach. And new investors, especially those in lower income brackets who don’t have much wealth to spare, are losing money right now. In the case of crypto or single stock owners, they can lose a lot. This will undo some of the gains in household balance sheets and could deepen a recession, if we have one.
The stock losses will still not be as financially devastating as the housing crash. In the mid-2000s, when housing accounted for an average of 62% of Americans’ net worth, the housing crash of 2008 was calamitous. Property values may start to fall now that the market is easing, but households are less indebted and less vulnerable.
Today’s bear market is a harsh reminder to new enthusiasts that stocks are risky, and that comes with its own set of risks. Some equity exposure is an important part of wealth creation and a more inclusive economy. But there is evidence that investing and losing money can sour people on the stock market. Some new investors may be less inclined to invest in the future and they will lose future earnings, which will increase inequality.
With a plummeting stock market, rising prices and interest rates still too low to curb inflation, it’s hard to tell investors where to turn. No one can afford to stay away from risk. The fact that some people find themselves in a bear market struggling with overly risky portfolios suggests we need better financial literacy to explain the role of risk in investing, not the classes celebrities promote. bitcoin. According to the 2021 Fed survey, only 43% of respondents thought owning mutual funds was less risky than owning individual stocks.
Heightened interest in stock ownership during the pandemic was a potential opportunity for a broader segment of Americans to benefit from rising values, but now that the market is down, it could mean we find ourselves in a situation worse. In the future, perhaps this experience will inspire new enthusiasts to take a more realistic approach to risk in their equity portfolios, instead of extinguishing their zeal altogether.
Allison Schrager is a Bloomberg Opinion columnist covering the economy.