But the stock market has held up quite well, thank you, rebounding strongly off of its March lows.
Why is it, then, that more people are not benefiting from the market’s resilience?
One problem is that only about one-half of all Americans are invested in the U.S. stock market.
Owning stocks, which are essentially small slices of U.S. companies, is an easy and effective way to take part in what has been a long-running tradition of American wealth creation. Many Americans who do own shares do so through their workplace retirement plan, such as their 401(k), or through mutual funds they have invested in outside of work.
Here’s a snapshot of recent ownership trends, from Paul Vigna of The Wall Street Journal:
“The percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, according to an April Gallup poll, down from a high of 67% in 2002.
Stock ownership is increasingly concentrated among a sliver of the population. The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to data from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009.”
So while it is true that the stock market has created enormous wealth over time, many Americans have not participated. Some people very simply do not have disposable income to invest. Others could afford to invest, but for various reasons, don’t manage to get their savings into an investment account.
There is no doubt that Americans need to do a better job saving for retirement, and there are already calls to revamp 401(k) plans, which for most Americans provide the basic framework for saving.
I visited Australia as part of a U.S. financial planning delegation in 2018 and was intrigued to learn how they use a mandatory 401(k)-like system to make sure all Australians save for retirement and have the opportunity to invest in the growth of their own country. (You can read my observations about financial planning in Australia here). Most of the Australian system is funded by employer contributions.
For people in the U.S., the hardest step is the first one. Once you’ve set up the savings habit – whether putting money aside into your workplace plan, or funding your own individual investment account – you’ll find it easy to keep up.
Here’s some simple tips:
- Start small, but start now. Even small amounts of savings can grow exponentially over time.
- Make saving for your financial future a habit. Aim to put at least 10% of income into savings, ideally into your work 401(k), an IRA or Roth IRA, or an individual account that can grow over time.
- Once you’ve started saving, adopt an investment strategy that matches up your long-term goals with long-term investments. Time is the most powerful tool on your side. Use it wisely by picking investments that can compound over your investment horizon.
- If you’re working, ensure you are signed up and contributing to the 401(k). And don’t forget about other valuable workplace savings opportunities, like flexible spending, health savings, or employee stock purchase accounts. They are all key parts of your total compensation package.
- Don’t forget to invest in yourself and your future earnings potential. That means smart spending for your higher education and professional credentials.
- Credit cards, high auto payments, and inadequate health insurance are surefire ways to destroy – not create – wealth. It’s hard to dig yourself out of holes, so be very careful taking on debt and costly lifestyle overhead.
The Takeaway: Now more than ever, you need to take advantage of smart savings and investment strategies that can secure your economic freedom. If you are not confident that you are doing enough for your future, talk to your advisor to map out a customized plan.