In the US, income inequity and financial insecurity are closely tied to race. While the median family net worth is nearly $171,000 among white families in the US, for Black families it is just $17,600, according to the Federal Reserve’s Survey of Consumer Finances. Forget “retirement goals and dreams”, in real terms, this gap means that many Black families lack access to safe housing, quality education, and sufficient healthcare.
This disparity perpetuates and amplifies across generations. According to the Federal Reserve, white families transfer wealth between generations 3x more frequently than Black families do. This means that Black families are at disadvantage vs their white counterparts from the very beginning. In addition, Black families are nearly twice as likely to be denied access to credit, preventing upward progress achieved through things like mortgages and business loans. Furthermore, Black-owned businesses are turned down for bank financing twice as frequently as white businesses. This starves businesses of capital needed to grow or recover from major setbacks, such as the COVID-19 pandemic.
Now, as frequent readers of this blog know, investing in the stock market is a great way to build wealth in the long term. However, black families are less likely to own stocks in comparison to white families. This is partially because Black families have fewer funds with which to invest (the family net worth differential is ~10x!), and partly because Black communities have historically struggled to trust the stock market.
Despite the barriers and challenges, Black Americans have been able to accelerate their rates of education attainment, entrepreneurship and stock market ownership (see exhibit). Although overall numbers of degrees and businesses are significantly below levels attained by whites, the Black community is making significant progress.
According to a 2016 study, 67% of Black Americans with incomes of at least $50,000 were invested in the stock market or mutual funds, compared with 86% of white Americans. (In 2010, the split was 60% and 79%, respectively). This is a step in the right direction but the level of investment in dollar-amounts must also increase for Black Americans to have comparable benefits to their white counterparts.
Many large corporations have recently announced efforts to help close this gap: Bank of America pledged $1 Billion to fight economic and racial inequity and Fortune 500 companies such as Amazon, Apple, Google and Facebook have made large donations to civil rights and social justice organizations.
For those who have never invested in the markets before, custodians like Fidelity and Schwab have reduced barriers to make it easier and cheaper. Fidelity offers a collection of mutual funds with no minimum and a 0% expense ratio index funds. This means you can start investing with as little as $1. Schwab’s Slice Program allows investors to buy fractional shares of America’s leading companies like Apple and Amazon without needing to shell out a lot of money. The minimum investment is just $5; low cost transactional fees may apply. In addition, here in Michigan, the MESP 529 Education Saving Program has no fees and just a $25 minimum to open an account. I can only hope that these low cost, low minimum opportunities will continue to provide minorities with the access they need to start investing.
Have other suggestions of ways to close the financial inequity gap? I’d love to hear from you! Email me at email@example.com.