Gallup has released some new data on American views on investment markets that I think are worth discussing.
Overall, approximately 55% of U.S. households have some investment on the stock exchange (either through individual stocks or mutual funds) that has remained unchanged from two years ago, but is below the 63% high shortly after the turn of the millennium. The decline from 63% to 55% doesn’t sound like much until you remember that there are 128 million households. So we’re talking about about 10 million fewer families investing in stocks than 20 years ago.
Americans are less likely to see stocks or mutual funds as the best long-term investment after the U.S. markets have dropped more than a third due to the economic impact of the coronavirus outbreak last month. The current 21%, who call stocks the best investment, are down six percentage points year over year, and the lowest gallup since 2012. Real estate remains in the top spot, while gold and savings accounts lag behind stocks.
Gallup asks if the respondents prefer real estate over shares in the long term, and of course they do. For me, however, this is a confusing question because for most of the people interviewed, the only property they have had experience with is their own home. The value of the home does not fluctuate every day because there is no ticker. And they have emotional ties to their homes – here their children grew up and their most beautiful memories are awakened. You can’t have an eighth birthday party for your daughter in an IRA account.
At 35%, real estate remains the most popular investment for Americans, as has been the case since 2013 when the real estate market recovered. More than a third of Americans have called real estate a top investment since 2016.
I think the most interesting thing about the new survey is the fact that the affinity for stocks among Americans, which goes back to the twin bear markets of the past decade, has never really recovered. They watched the S&P 500 cut in half twice in seven years, and have never forgotten it, despite the massive gains since the Dow Jones rose from 6,500 to nearly 30,000 between 2009 and early 2020. They remember how they went through the economic recessions that accompanied these two stock market crashes, and those experiences stayed with them.
Another variable is that not everyone who participated on the way down could participate on the way up, which in many individual cases would be enough to invest people for the rest of their lives. This is the kind of fateful cruelty that gives rise to the idea that things are manipulated and that someone else benefits from their own misfortune.
And now the percentage of households who believe they are investing in stocks long term is a good idea versus a bad idea split exactly in the middle, with wealthier households more likely to say yes and lower income households more likely to say no. There is a lot to unpack within this distinction, but suffice it to say that life experience plays a big role – if you’ve never invested excess wealth and never had the experience of benefiting from an increasing equity portfolio, it’s difficult to do that To have a perspective that this would be more attractive than owning a house, for example, and not having to pay rent to someone.
Now imagine asking this question to people after seeing the stock market fall 30% in three weeks while never having a home where they can seek shelter was vital to their survival ! What would you say?
Another point worth noting is that if you see a wealthy person in your own community, it is impossible to know how much that person has invested in the stock market. But you can see your house and property with your own two eyes. Cars, houses and boats are more reminiscent of wealth than of mutual funds. They are tangible evidence of success, so it makes sense for people who have not yet succeeded to ask for the kind of wealth that they can see, touch, and walk around in.
Housing prices in the United States have returned about one percent in the long term and adjusted for inflation, while stocks have returned about seven times. Of course, there are many regional differences over the decades. Conceptually, homeowners may understand that the value of their home rises and falls over the years, but they don’t feeling this “volatility” until they sell or buy. In addition, the cost of owning a home is not just what you pay for it. Maintenance, taxes, remodeling, damage repair, etc. are rarely taken into account when someone brags about how cheap his house was when he bought it 30 years earlier.
This does not mean that owning a home is either a good or a bad investment, especially if we withdraw all the emotional aspects of where we live. It is an individual decision, regardless of whether or not the price increase can be compared to an equity portfolio. This is why it is so difficult to get respondents to objectively answer the question about real estate compared to the equity portfolio.
There is a segment in America that has the luxury of doing both, but unfortunately it’s not big enough.
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