Although workplace retirement plans have made a big difference, there's still a yawning gap between white and African-American investors when it comes to stock market participation, says Ariel's Mellody Hobson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. Ariel Investments just released their Black Investor Survey for 2015. I'm pleased to be joined today by Mellody Hobson--she's the president of Ariel Investments--for her take on it.
Mellody, thanks so much for joining me today.
Mellody Hobson: Thanks for having me.
Glaser: So, you've been conducting this survey since 1998. Since then, we've seen the dot-com boom, and we've seen the Great Recession. What's your sense of how investors' thinking has changed, both black and white investors, over that time period?
Hobson: I think the major thing we've seen with African-American investors is that they have become more comfortable with the stock market, which is indicated by their participation rate. When we first did the survey in 1998, 57% of African Americans were invested in the stock market in some way, through individual stocks or stock mutual funds, versus 67% today. So, in that 17-year period, we've moved the needle about 10 points, which is pretty meaningful in the whole scheme of things. So, I think that is, again, a function of comfort and exposure.
Glaser: But still, when you control for income, black investors are still investing at a lower rate than other groups. Why do you think that is and how do you close the rest of that gap?
Hobson: Well, that's for sure. The survey was for people who make $50,000 in household income or more. And when we looked at that participation rate of African Americans versus white Americans, while we are at 67%, whites are at 86%. So, there is a huge difference between blacks and whites, and obviously we have a long way to go.
<TRANSCRIPT>
Glaser: You've mentioned in the past that workplace retirement plans could be a key feature here. Do you see that as still playing out?
Hobson: Absolutely. The workplace retirement plan, I think, has been one of the key drivers of African-American participation. It has driven that comfort level and exposure that I talked about. There is no question about it. I think it's actually been a game-changer when it comes to investing. And you can see that through a very specific question that we asked. We wanted to understand how people got involved in investing. For African Americans, seven out of 10 said it was the workplace retirement plan that drove them to ultimately be a stock market investor. So, that has played out very, very well and will continue to play out. It has been a game-changer. Where I think the next game-changer will occur is in auto-escalation. We've had auto-enrollment, which has put a lot of people in the stock market who had no experience before; now the question is, can we get them to start to save and invest more over time?
Glaser: There are some programs that are relatively new--like myRA and, in Illinois, some other savings plans. Do you think that those have the potential even if they don't offer equity investments to get people more comfortable with the market? Or is the jury still out on those?
Hobson: I think every bit helps. I'm very enthusiastic about all the different ways that we can capture and create investors, because it's ultimately good for society. It's good for the individual; it's good for, hopefully, the employer who has a worker who is more financially secure. And ultimately, it's good for all of our society when you think about the types of programs that have to be in place when people don't have the level of saving and investing that they need. So, I think you have to try lots of different things, and that all creates a conversation about the importance of this issue--which ultimately, I think, moves us all along on the spectrum of being more sophisticated and comfortable investors. But a lot of work still has to be done in education. There might be a lot of programs out there, but we need to make sure that education is there as well and that the nomenclature around investing is understood by everyday people, which is why organizations like Morningstar and the financial advisors that work with you are so important.
Glaser: One of the things that really struck me about the report were some of the questions about real estate and if it makes sense if you have a marginal dollar whether you invest in the market or invest in home improvement. Can you talk about how people's thinking about real estate investment has changed over time and whether we've seen big differences between African-American investors and white investors?
Hobson: Well, clearly, the bloom is off the rose when it comes to real estate. When we started asking these questions about real estate and what's the best overall investment, if you even just looked back to 2004 where we asked what is the best overall investment you can make and then jump ahead a decade. We've moved from real estate being the best investment for white and black Americans--but significantly more for black Americans--to now the stock market and mutual funds being considered the best overall investment that you can have.
The financial crisis was the reason for that, and obviously the financial crisis was rooted in a real estate bubble; once that bubble burst, there wasn't the same sense of being enamored with real estate that existed before. That's great because the facts are inarguable. If you look at the long-term return potential of stocks versus everything else, the stock market has outperformed all other investments. So, while we've slowly come to that realization--and perhaps it was hastened along by the bursting real estate bubble during the financial crisis--we're ultimately getting to the right decision.
Glaser: One of the things that also came from the financial crisis was people being worried about the stock market and maybe not being terribly optimistic about the future of the economy. You've tracked this for a while now. Do you see a big gap between how African-American investors think about the economy and about the existence of the American dream versus white investors right now?
Hobson: Here's what absolutely surprised me in the recent survey: The optimism had always been higher--especially if you said bullishness around the stock market--for white investors, and it flipped in the last five years. African Americans are more bullish about the stock market, as of when we did the survey last year, and also they are more optimistic about the economy, the recovery, and where we are. I actually was very, very surprised by that outcome. I think that creates an unbelievably strong opportunity for investment firms to tap into that optimism to ultimately convert that optimism into action in terms of investing.
Glaser: So, you do see that optimists put their money where their thoughts are? You see that they actually do invest more than people who are more pessimistic?
Hobson: Correct.
Glaser: Mellody, I certainly appreciate you taking the time today to share the results of this survey.
Hobson: Thank you so much for having me.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
