The wealth destruction over the past few weeks has been brutal. Markets are down more than 20 percent from the start of the year; the US is officially in a bear market. One estimate (from last week) said that household net worth fell 0.4 percent.
A bear market is never good, but this time it is especially worrying because in the past few years stock investing has become trendy, with TikTok stars becoming the new investment gurus. Now many of these new investors are learning TikTok is not the best place to get investment advice.
There are many culprits to blame for the falling stock market, including policy errors that contributed to inflation, overexuberance, or just the human tendency to forget that sometimes risky markets fall. Even in a perfect world, bear markets are a fact of life. Stocks do not offer any guarantees of a return, and they do fall from time to time.
“Risk” is the operative word in the risk premium on stocks; that is why they usually return more than bonds. What is concerning is that after years of a bull market and a few rounds of government cash payments, some households might be overexposed to risk, holding more stock than before and in riskier portfolios. More Americans than ever own stock.
The biggest reason is the increased popularity of workplace retirement accounts such as 401(k)s. The US Federal Reserve’s Survey of Consumer Finances data showed that in 2019 53 percent of households had some equity in their portfolio, up from 50 percent in 2010, and 32 percent in 1989. Survey data suggest stock ownership increased some during the COVID-19 pandemic, but not as much as the meme stock phenomena seemed to imply.
The share of Americans owning stock only went up a few percentage points. A survey from Charles Schwab reveals their newest investors tend to be younger and make less money than their pre-2020 customers. They also tend to be more optimistic when it comes to risky assets.
What might be more concerning is that even among more experienced investors, portfolios got riskier. There has been a lot of speculation that time at home, checks from the government and social media encouraged more people to day trade. A Fed survey showed that 34 percent of Americans own individual stocks and 19 percent of individual stock owners started trading in the past three years. The survey also found that 12 percent of households have some amount of cryptocurrency.
Although risk has increased, most households have not bet the farm on the market. The Survey of Consumer Finances, which was last taken in 2019, showed that stock market exposure has remained fairly stable since the financial crisis, at about 40 percent of financial assets, but among older Americans who are closest to retirement, stock exposure has increased. Equity makes up about 40 percent of financial assets among 60 and 70-year-olds, compared with 35 percent in 2010.
Even if the increase in stock exposure is relatively small on aggregate, it is still concerning for a few reasons. Falling markets would put many people’s retirement plans on hold or out of reach altogether. New investors, especially those in lower-income brackets who do not have much wealth to spare, are losing money right now.
In the case of crypto or single-stock owners, they might be losing a lot. This would reverse some of the gains in household balance sheets and could make a recession worse, if one occurs.
The stock losses still would not be as financially devastating as the housing crash. Back in the mid-2000s, when housing averaged 62 percent of Americans’ net worth, the 2008 crash in real estate was calamitous. Real-estate values might begin to fall as the market softens, but households are less levered and less vulnerable.
Today’s bear market is a harsh reminder to new enthusiasts that stocks are risky — and that brings its own risk. Some stock exposure is an important part of wealth creation and a more inclusive economy.
However, there is evidence that investing and losing money can sour people on the stock market. Some new investors might be less likely to invest in the future, and they would lose out on future gains, which would worsen inequality.
With a plummeting stock market, rising prices and interest rates that are still too low to curb inflation, it is hard to tell investors where to turn. No one can afford to sit out risk. That some people are finding themselves in a bear market saddled with overly risky portfolios suggests they need better financial literacy to explain the role of risk in investing — not classes where celebrities promote bitcoin.
A Fed survey from last year showed that only 43 percent of respondents believed that owning mutual funds was less risky than owning single stocks.
The increased interest in stock ownership during the pandemic was a potential opportunity for a broader segment of Americans to benefit from rising values, but now that the market is falling, it could mean they end up in a worse place. Perhaps this experience will inspire new enthusiasts to take a more realistic approach to the risks in their stock portfolios, instead of quenching their zeal entirely.
Allison Schrager is a Bloomberg Opinion columnist covering economics and a senior fellow at the Manhattan Institute. This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Since the end of the Cold War, the US-China espionage battle has arguably become the largest on Earth. Spying on China is vital for the US, as China’s growing military and technological capabilities pose direct challenges to its interests, especially in defending Taiwan and maintaining security in the Indo-Pacific. Intelligence gathering helps the US counter Chinese aggression, stay ahead of threats and safeguard not only its own security, but also the stability of global trade routes. Unchecked Chinese expansion could destabilize the region and have far-reaching global consequences. In recent years, spying on China has become increasingly difficult for the US
The annual summit of East Asia and other events around the ASEAN summit in October and November every year have become the most important gathering of leaders in the Indo-Pacific region. This year, as Laos is the chair of ASEAN, it was privileged to host all of the ministerial and summit meetings associated with ASEAN. Besides the main summit, this included the high-profile East Asia Summit, ASEAN summits with its dialogue partners and the ASEAN Plus Three Summit with China, Japan and South Korea. The events and what happens around them have changed over the past 15 years from a US-supported, ASEAN-led
Lately, China has been inviting Taiwanese influencers to travel to China’s Xinjiang region to make films, weaving a “beautiful Xinjiang” narrative as an antidote to the international community’s criticisms by creating a Potemkin village where nothing is awry. Such manipulations appear harmless — even compelling enough for people to go there — but peeling back the shiny veneer reveals something more insidious, something that is hard to ignore. These films are not only meant to promote tourism, but also harbor a deeper level of political intentions. Xinjiang — a region of China continuously listed in global human rights reports —
As it has striven toward superiority in most measures of the Asian military balance, China is now ready to challenge the undersea balance of power, long dominated by the United States, a decisive advantage crucial to its ability to deter blockade and invasion of Taiwan by the People’s Liberation Army (PLA) of the Chinese Communist Party (CCP). America expended enormous treasure to develop the technology, logistics, training, and personnel to emerge victorious in the Cold War undersea struggle against the former Soviet Union, and to remain superior today; the US is not used to considering the People’s Liberation Army Navy (PLAN)
RSS