Question

As you've read in your text, the overall percentage of U.S. citizens participating in a stock market either through individual holdings or through financial intermediaries such as mutual funds has declined since the 2008 recession. Prior to 2008, a greater percentage of Americans held stock market investments than do in 2018. This is an interesting characteristic, given the following factors:

1. Investing in the market through savings plans, 401k or 403b accounts, individual IRAs, or similar retirement plans has never been easier given the amount of information available to any individual. Individuals can invest small amounts such as $20 and benefit from dollar-cost averaging through automatic deposits and electronic transactions such as payroll deductions.
2. While a vast majority of Americans will be dependent on Social Security as their primary source for retirement income, the message that relying solely on SS for retirement continues to be broadcast by media outlets such as the AARP.
3. Since 2008, the markets have rebounded significantly from their 2008 lows.
4. Basic principles of investing are easily located on the internet, from a variety of sources. For example, see the "Index Card" resource posted in Week 5, which is a short list of fundamental investing principles.

For this discussion post, you are to state a position and present an argument related to the above state of investing by U.S. citizens today. Why has the overall percentage of Americans invested in the market decreased in the last decade? And, subsequently, what can be done about this?    In your argument, which is to be supported by both textbook and outside research, delve into one or more of the primary concepts presented in this week's readings. These include the various stock market indexes, international markets, the role of the mutual fund industry, active versus passive investing, in addition to multiple other concepts.

Answer 1

The most reliable and widely available statistics on the % of Americans who invest in the stock markets is based on the Gallup organization. Since 1998, every year the organization asks the Americans about stock investments their nationwide polls. They ask whether the Americans have money invested in the stock markets through direct ownership of shares, mutual funds, or retirement plan such as a 401(k) or an IRA.

The statistics say that in 2007, just before the 2008 economic crisis, ~65% of the Americans were invested in the stock market through one of the routes mentioned above, In 2012, the number was the lowest at ~53%. The stock market participation has improved only slightly since then until 2017. Another thing to note is the demographics. In the top 30% income group more than 90% are invested in stock market while in the bottom 50% individuals by income, the stock market participation is less than 1 in 3. The participation % is also lower in the millennials and the very younger and the very older generation.

There are 2 observations that come out from this trend- first is related to the drop in stock market participation over the last decade. It is true, as stated in the question, that the markets have given excellent returns in the past 8-10 years, measured from the lows reached in the 2008-09 period. The retirement accounts such as 401Ks, IRAs, and mutual fund industry has made investing in stock markets exceedingly simpler and investor friendly. Even the naïve investors can also participate in the stock markets. However, the stock market participation is going down not because of availability but because of investor mentality. Those who experiences 2008-09 financial crisis, have the horrors of that period itched in their mind. The banks and other financial institutions started becoming bust taking down the stock market with them. The ripples were felt all across the economy and there was sever recession in the US, which spread around the globe. The world economy has still not reached to the pre-recession state in some aspects such as interest rates. This is also called as recency effect or recallability effect. The most easily recallable event of the investors in stock markets is the crash of 2008 and hence, they are still not comfortable investing in stock market again, even though the cycle has long reversed. The situation is unlikely to reach its pre-recession state soon in terms of stock market participation among the public. The major reason why the stock market participation was so high until 2007 was because the public had seen the stock market going only up for almost a decade before. This created an opinion among the uneducated investors that they can make quick and easy money in the stock market. When the stock markets tanked during the recession, they saw their investments getting wiped out very quickly. Hence, the memories are still in the general investors mind which is keeping the stock market participation low. For the general investor to forget the horrors of 2008 crisis, they have to experience a full economic cycle which will create a more moderate and realistic picture of the stock markets in the minds of the individuals. The educated and sophisticated investors have returned to the stock market very early after the crisis was over. This can be seen from the higher participation in the upper income group, which is supposedly well aware through the availability of better resources. The Financial market intermediaries, the mutual fund industry can run public awareness programs for investor education. This method has been successful in some of the better regulated economies such as Japan, China and India. The stock market participation in these countries has not dropped as low and has even recovered earlier than the USA.