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Investors Continuing to Be Their Own Worst Enemy—Evidence from the Fed

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Man Looking

With the S&P 500 Index up about 170% from its low point in March of 2009, investors should have cause for rejoicing. Unfortunately, it now appears that many investors were there for the risk but did not stick around for the return, according to the Federal Reserve’s 2013 Survey of Consumer Finances. This behavior appears to have exacerbated the wealth gap in America. The bar chart below shows how the prevalence of stock ownership changed from 2007 to 2013. The top 10% of families by income increased their ownership by 1.5 percentage points while the bottom 90% decreased by 5.0 percentage points.

The increase in the wealth gap is seen in the chart below which shows that the top 10% increased their share of the national wealth by 2.4 percentage points. Of course there were many other contributing factors such as unemployment.

A Wall Street Journal article1 on this topic quotes Dean Maki, chief U.S. economist at Barclays and a former Fed researcher on consumer balance sheets:

“One unfortunate effect of recessions and stock-market declines is they often induce people to exit the market at exactly the wrong time. In retrospect, anyway, the right thing to do would have been to buy more equities at the trough, not to sell equities at the trough.”

While there is no denying that many who sold stocks did so out of need rather than market-timing, the author of the WSJ article (Josh Zumbrun) cites the Panel Study of Income Dynamics from the University of Michigan which found that wealthier and more highly educated people were less likely to sell, even after controlling for job loss or mortgage distress.

The words of Benjamin Graham from The Intelligent Investor ring true today: “The investor's chief problem - and even his worst enemy - is likely to be himself."

The stock market has often been accused of being a facilitator for the continuing enrichment of the rich and the impoverishment of the poor. Of course, this is oversimplifying matters. We have seen many examples of middle class workers who consistently saved and invested over a long period of time and now have a secure retirement. The question is how to improve investor education so that they do not engage in sub-optimal behaviors during market extremes. The natural place for it is employee-directed retirement plans such as the 401(k). Retirement education consultant Dennis Ackley described the current 401(k) situation as “the largest failure ever of adult education.” 

We at Index Fund Advisors are focused on replacing speculation with education. If you would like to learn more about how we implement investor education in the retirement plans we advise, please call us at 888-643-3133.

1Zumbrun, Josh, “Market Missteps Fuel Inequality”, Wall Street Journal, 10/27/2014.