Investing is becoming more accessible, but education must come first.
President Biden announced this year that the racial wealth gap is the closest it’s been in 20 years. The news, gleaned from a 2022 Federal Reserve study, also showed that for every $100 of wealth held by white families, the average Black family held a startling $15. Furthermore, the gap has doubled from 1989 to 2016. As a result, while things are getting better, the absolute value of the wealth gap between white and black families today is wider than ever before.
The Black-White Income Gap, 1970 to 2018
This mounting crisis has to first be addressed in the classroom. Although 27 states require some personal finance curriculum in high school, a vast majority of graduates do not have access to high-quality financial education programs. This leads to graduates leaving school ill-equipped to benefit from financial markets and unable to engage in conversations around wealth, debt, loans, and countless other economic devices that influence their lives.
So why do people avoid financial markets? And where are the gaps in existing education resources that lead individuals to stall along their investor journey? With these answers we can collectively invest in education resources to support stronger financial futures for students.
The Nonlinear Journey Of An Investor
Investing would seem to follow a linear path: an individual opens an account, purchases stocks, and builds a portfolio. But according to the FINRA Investor Education Foundation, the reality is less straightforward.
It starts with contemplating: observing from the sidelines, sometimes for a few weeks, other times for an entire lifetime. “We don’t normally think of that stage of investing,” says Olivia Valdes, Senior Researcher at the Foundation. “But it’s actually a pivotal stage because people are deciding, ‘Am I really an investor, and how does this system work?’”
This stage ends when individuals make their first investment. Engagement follows, as these new investors actively participate in financial markets and develop experience. The journey culminates with integration as investing incorporates into an individual’s financial identity.
Unfortunately, many individuals stall at the contemplation stage.
The stages of investing.
The “Access” We’re Providing Isn’t True Access
According to another recent FINRA report, in 2020, 3.6 percent of the U.S. adult population opened new, taxable accounts for the first time. The surge was attributed to new mobile trading platforms, lower barriers to investing, and the pandemic stimulus that prompted stay-at-home speculation. The media applauded the “democratization” of Wall Street.
Two years later, post-lockdowns and stimulus checks, this expansion of the investing population persists: 4.2 percent of the adult population invested in stocks for the first time in 2022, and another 4.9 percent invested for the first time but opted to invest in high-risk cryptocurrencies.
Since this surge began in 2020, a disproportionate percentage of new investors are Black and Latino, and nearly half of Black and Latino investors are younger than 35.
Demographic data on investors.
This surge is encouraging and represents a long-needed catch-up, but we should be cautious. The ubiquity of commission-free trading has unlocked unprecedented access for communities in historically neglected communities, but it is not a silver bullet.
Making it easier to open a brokerage account accelerates individuals past Contemplation, but it does so without any supporting education. Now more than ever, individual investors have moved from the sidelines and started brokerage accounts, but that creates a precarious situation without adequate financial education in schools.
Regardless of class or profession, when the economy plunged into recession in 2008 and 2020, Black and Latino households lost 48% and 44% percent of their wealth, respectively. In contrast, white households lost just 26%. A major contributing factor across both recessions was the lack of true access. To avoid repeating past mistakes, we have to start addressing the financial literacy crisis in our schools.
The S&P 500 hit record highs in March and we applauded the progress of narrowing the wealth gap, but we should remember the wealth erasure in past recessions, and the communities that have to endure the worst, to avoid repeating history.
