Why Do Investment Results Differ Dramatically By Race?

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The Pew Research Center made a big splash this week with a new report highlighting the wealth disparity between Americans – specifically between white, black, Hispanic and Asian households. (For an overview of Pew’s conclusions, TIME Moneyland takes a look at the numbers here.)

But at least one area analyzed — stocks, bonds and investments — calls for a deeper look.

In an abysmal economic environment where budget-conscious Americans are tossing nickels around like manhole covers, Wall Street is one place where households can close the gap financially from lower home values and weaker take home pay.

(MORE: Great Recession Drives Financial Divide Between Whites, Minorities)

That’s happening on some demographic fronts. In the 2005-2009 timetable covered by Pew, while white households saw their investment portfolios (stocks and mutual funds) fall by 9%, Asian households did significantly better, rising 19% over the same period.

But black and Hispanic households saw their investments in freefall. Hispanic households lost 32% of their investment portfolio wealth, while black investors saw their losses more than double – losing 71%.


Value of stock and mutual funds owned by different household demographics

Demographic Investment value Cash Amount (Median)

Asians                                    + 19%                                              $25,270 to $30,000

Whites                                    – 9%                                                 $30,984 to $28,043

Hispanics                              – 32%                                               $21,974 to $15,000

Blacks                                    – 71%                                                $27,468 to $8,000

Source: Pew Research Center, 2005-2009


Why the growing disparity in investments between the country’ss largest demographic groups? Pew doesn’t really say for sure, but here are a few ideas:

Staying in the market – Riding out market gyrations may be job one for wealth accumulation. If you sold out of the market when it was in freefall in 2008 (see chart below) and didn’t get back in until the market was well on its way back up in 2009, chances are your portfolio value took a significant hit.

S%P 500 Annual returns – 2005-2009

2005    –  4.91%

2006    – 15.79%

2007    – 5.49%

2008    – 37.00%

2009    – 26.46%

While nobody can say for sure, it appears that Asians, and to a lesser extent, white households, stuck to their guns and stayed in the market in 2008, and thus were in good position to benefit from the rebound in 2009.

(MORE: Want Happiness? Don’t Buy More Stuff — Go on Vacation)

Need for cash – The Pew study points out that black and Hispanic households took on more unsecured debt (usually that means higher credit card bills). To pay that higher credit card tab, such households may have dipped into their investment assets to keep current on bills. Blacks and Hispanics may also have been more likely to raid their investment portfolios to pay mortgages and rent, which can decimate an investment portfolio.

Higher unemployment – Unemployment rates for whites and Asians were lower than for black and Hispanic households during the four-year period measured by Pew Research. With more of the latter two demographic groups out of work, the need to use their investments to live on was stronger, i.e. to buy groceries, pay for health care, and keep the lights on.

Now that home values have plummeted, stocks and mutual funds may be the best bets for U.S. household wealth. But the only way to win is to play the game – and not move money out of the financial markets early. According to Pew, that’s a lesson that black and Hispanic investors have learned the hard way.