One bright spot in the U.S. economic recovery has been the rebound in stock prices, which continue to show signs of strong growth. As of November 2014, prominent stock market indexes, the Dow Jones Industrial Average and the S&P 500 Index, both have nearly tripled in value since March 2009.
But a rising stock market only benefits the wealthy, right? Not so fast. The fact is that participation in the stock market has become much more broad-based than it was even a few decades ago — and that can be good news for investors who’ve stuck with the market through ups and downs.
A recent survey of consumer finances by the Federal Reserve, published in September, sheds light on the realities of stock ownership among middle-income families in the United States: Among families making between $40,000-60,000, nearly half (49.7 percent) own stocks in one form or another. Among families making an average of $80,000 that number rises to 70 percent.
Many of those middle-income families may not necessarily think of themselves as “investors” if they don’t own individual stocks directly. But remember that stock ownership can be either direct — for example, owning 100 shares of General Electric stock through a brokerage account — or indirect, meaning the stocks are held in a pooled fund that encompasses multiple investors. Such indirect investment, like mutual funds or pension/retirement funds, is actually how most Americans invest in equities.
Why are equities a favorite choice for both direct and indirect investors? It’s all about the returns, experts say.
“One of the key reasons that investors favor stocks is that, over the long run, the asset has historically performed very well,” a recent Wall Street Journal article points out. “Thus, it’s no surprise that stock wealth grows with age. Even middle-income families who sock away some savings into the market over the course of their careers can have a substantial amount of stock wealth by the time they’re near retirement.”
Take mutual funds, for instance, which allow an investor to purchase a “basket” of stocks (or other financial instruments) at one time. In 2013, an estimated 56.7 million U.S. households—46 percent of households—held mutual fund investments, many through 401(K) retirement accounts.
Likewise, millions of Americans are invested in stocks through retirement funds, such as public pension funds. Teachers, firefighters, police officers and other public sector workers count on state and local pension funds for their retirement needs. Those pension funds, in turn, rely on steady growth in the markets to ensure that they can pay out to beneficiaries both now and in the future.
It’s not just the capital appreciation of the equities that creates wealth: many investors can expect to realize additional income from dividends paid on their shares.
But one area of potential concern flagged by the Fed’s consumer finance survey is that, at least over the short term of the last few years, many Americans pulled their funds out of the market in hopes of stemming losses after the cyclical declines of 2008-2009.
Unfortunately, in so doing, many missed out on the capital gains over the last five years as the markets recovered. Most of those who held steady, and continued to invest in equities, whether directly or through retirement and investment funds, have seen the value of their investments rebound.
A 2014 survey by the Gallup polling organization finds that many Americans still have residual anxiety about investing. Fifty-six percent said that if they had an extra $10,000 to invest, they’d hold it in cash or put it in a certificate of deposit (CD).
“It is exemplified by the finding that so many investors would opt to park an additional $10,000 in cash or CDs—where they are virtually guaranteed no meaningful growth—rather than invest it in stocks,” the Gallup survey concludes. “Investing in stocks is certainly not appropriate for everyone, in every circumstance; but making wise financial decisions requires some basic market knowledge. The good news is that investors by and large recognize that their financial knowledge is limited, and believe they need professional advice.”
Indeed, for those who would like to start investing but aren’t sure how to go about it, recognizing the benefits of working with an investment professional who can help develop smart saving plans for the future is a good place to start. Similarly, investing in funds managed by professional asset managers also provides a good mechanism for accessing the stock market without having to pick individual stocks.
By spending less than they earn and investing the difference, most investors stand a better chance of seeing solid returns over time, which means they’ll be able to count on that added wealth to fund a comfortable retirement, pay for college education and other needs. But it all starts with learning more about the potential benefits of investing in the markets.