Middle-class savers aren't returning to stocks, despite Wall Street's big rally

Stock certificate

We poured almost $52 billion into mutual funds and exchange-traded funds that invest in U.S. companies during the first quarter — the biggest net increase since early 2004.

Those funds are the primary way middle-class savers buy stocks, often through retirement plans such as 401(k)s and IRAs, so you might assume that soaring share prices had lots of us jumping back into the market this winter.

But that wasn't the case.

A Gallup poll conducted in early April found that the number of Americans who own stock personally or jointly with a spouse declined for the sixth straight year.

Back in 2007, a record 65% of respondents said they owned stock either directly or through some kind of mutual fund, including exchange-traded funds, or ETFs.

Now only 52% report that they do, the lowest level since Gallup started tracking market participation in 1998.

The steepest drops in stock ownership have been among 30- to 49-year-olds and middle-income earners, dropping 14 percentage points and 16 percentage points, respectively, since 2008.

It would appear that those middle-class investors who were already in the market were the ones funding the $52-billion run, not new investors.

Maybe those who were already in the market allocated more of their money toward equities, or maybe it was from a boost in 401(k) contributions that funded the run or, most likely, a combination of the two.

Either way, millions are just sitting on the sidelines, impeding their ability to build financial security for themselves and their families.

"Most economists think that stocks have a large place in any long-term investment portfolio," Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College, told me.

He says that if you look at long-term data, stocks have greatly outperformed other asset classes.

While stocks may fluctuate in the short-term or even decline drastically in a year, they historically yield a return of about 10%.

We need that boost in our retirement plans.

So why aren't we diving into the market?

Unemployment might be one barrier to owning — the jobless rate fell to 7.5% in the April jobs report, but that's still fairly high.

"Americans' ownership of stock may, in fact, be more a function of their ability to buy it, than of whether its value is soaring," Gallup's Lydia Saad said in a release about the poll.

Webb agrees, explaining to me that the reason more middle-class investors aren't getting into the stock market is that they simply don't have the money.

Ed and Marie Peters

Success Story: How one couple saved nearly $100,000 before turning 30. Marie Peters credits vivid childhood memories of her parents’ arguments while balancing their checkbook as a motivator for stockpiling cash for retirement and rainy days. “I never wanted to fight with my spouse about money,” she says. As a result, Marie and her husband, Ed, see saving as a lifetime endeavor, not a monthly afterthought.

Many Americans who had their finances wrecked by the Great Recession are in a rebuilding phase.

They're still trying to replenish emergency funds and are putting off longer-term savings, which is more likely to involve equities, until they're more fully back on their feet.

In addition, numerous savers are afraid of the market, thinking it's too risky, Saad notes.

Although domestic stock funds are growing this year, worried investors pulled about $445 billion from them between 2007 and 2012.

I've personally heard several people call in to NPR lately to say they're fearful of Wall Street.

But this problem, I think, also boils down to a lack of experience and institutional support among the middle class.

Arguably, those from wealthy families have an advantage in the investment arena, a point that Mike Sante noted in a blog post last week.

Affluent families simply have more experience coping with market ups and downs, which made them more likely to stick with their shares through the worst of the recession, knowing that the markets would eventually head up again.

Middle-class savers, without that experience, who had just started to invest through 401(k)s or online brokerage accounts, panicked and bailed.

Those investors purchased high and sold at the bottom, ensuring a loss.

Plus, access to institutional advice is limited among the middle class, something that could have helped sway us to ride out a dismal market or provide alternatives for many who had to liquidate their 401(k)s.

Let's hope next year's Gallup poll shows the percentage of Americans who own stocks is up.

I think that would be a welcome milestone on our way to recovery.

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