Last month, The Motley Fool posted a beautiful video titled "Why Do You Invest?"
"Is it for the fancy cars? The dream home?" the video asks. "Maybe we invest for our families," it ponders, a reason I think most investors would agree with.
But there's a related question for millions across the country: Why don't you invest?
A life changing decision
A 2011 Gallup poll in the US found that 54% of households own shares, according to a 2011 Gallup poll. That leaves 46% that do not. In Australia, almost all working-age Australians will own shares through their super funds, but far fewer are augmenting their super with additional investments in shares.
Part of this is due to a lack of wealth — many families simply don't have any money to invest. But there's more to it. A 2008 paper by a trio of economists showed that sizable numbers of even the wealthiest families don't own shares. Of households ranked in the third quartile of wealth, 34% did not own stocks either directly or through mutual funds. Of those in the top quartile, 14% had no stock exposure. Within the richest 5% of American households, 6% owned no stocks.
Some of the wealthiest households may avoid stocks because ownership in private businesses offers better opportunities. But for others, the excuses are more interesting.
The numbers are compelling
Two centuries of data makes one point clear: Over the long haul, stocks trounce the returns of bonds, cash, commodities, and real estate — and they do it with less risk. Adjusted for inflation, $1 invested in US stocks in 1802 was worth $755,000 in 2006. In bonds, $1 turned into $1,083. Gold grew to $1.95. Cash depreciated to $0.06. During that 200-year stretch, the worst 20-year period for stocks produced a real return of 1% a year. For bonds, the worst period eroded half of investors' purchasing power.
Stocks win over the long haul, and yet a large number of us avoid them. Why is hard to know, but not particularly surprising. Humans' love for self-destructive financial behaviour is never-ending.
Past performance also guides people's willingness to own stocks. While 54% of US households currently own stocks, that figure was as high as 65% in 2007 when the market hit an all-time high.
Why don't people invest?
Those who do invest in stocks tend to do badly at it, reinforcing their perception that it's a losing game. One study showed that the S&P 500 returned 9.14% a year over a 20-year period ending 2010, but the average investor earned 3.83% a year by buying high and selling low. Don't see that as a reason to avoid shares – instead, it's a reason to be a more informed, aware investor.
Then there's the fear of being cheated. The same three economists mentioned at the top of this article also wrote a paper about trust. They found that 'trusting others increases the probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4% points'. The results 'explain the significant fraction of wealthy people who do not invest in stocks.'
Another possibility – though one I don't have evidence for – is that people willingly forego higher long-term returns to avoid the nausea of stock volatility. Academic economists tend to view people as unemotional "utility maximisers" for whom rational behaviour equals whatever is most efficient, but the real world is different.
Trading a percentage point of returns for a better night's sleep may be worth it for those who value a peaceful life over a large net worth. What looks irrational on the chalkboard often makes sense in the real world.
Foolish take-away
With pensions only providing a reasonably small fortnightly stipend, we need to take more responsibility for our own retirement. For most, the only way to get there is heavy exposure to stocks over many years. Will those now shunning stocks eventually change their minds? Will they ever get to retire?
It's hard to know, but the choice is yours. Take action. Start now. Your financial future may depend on it.
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The Motley Fool's purpose is to educate, amuse and enrich investors.This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
