Academic journal article Journal of Financial Counseling and Planning

Decomposition Analyses of Racial/Ethnic Differences in High Return Investment Ownership after the Great Recession

Academic journal article Journal of Financial Counseling and Planning

Decomposition Analyses of Racial/Ethnic Differences in High Return Investment Ownership after the Great Recession

Article excerpt

We investigated racial/ethnic differences in high return investment ownership using the 2010 Survey of Consumer Finances (SCF). Logistic regression analysis shows that even after controlling for income, risk tolerance, education, and other factors, Black and Hispanic households are less likely to hold high return investments than White households, but Asian/Other households are not different from White households. Based on results from decomposition methods, if the households with Black and with Hispanic respondents have the same characteristics and risk tolerance as White households, the racial/ethnic gap in high return investment ownership would be narrowed, but still exists. The Fairlie decomposition method might be more reasonable to use for decomposition analyses than the Blinder-Oaxaca method.

Keywords: decomposition analysis, investment choices, portfolio allocation, racial/ethnic differences, Survey of Consumer Finances

(ProQuest: ... denotes formulae omitted.)


One of the major purposes of financial goals for households is to accumulate enough retirement wealth at the time of retirement to maintain pre-consumption level even after retirement, which determines a household financial well-being. Despite the importance of savings for retirement, not all U.S. households save adequately for retirement. If individuals planned to retire at their desired ages, about 51% of households with a head whose age was 40 or older had savings shortfalls of more than 10 % after the Great Recession (Pang & Warshawsky, 2013). Considering the fact that younger households are less likely to save adequately for retirement than older households, the proportion of households that do not save adequately for retirement might be underestimated. Under these circumstances, investment in high return investments can be one of the important decisions to prepare households for retirement since high return investments are characterized by historically high mean returns for long periods, though they may appear risky because of volatility. Hanna and Chen (1997) concluded that it is rational for households with a long horizon to hold a risky diversified portfolio to maximize their lifetime wealth. Although there are some risks, households are better-off holding some high return investments with historically high rates of return, so that they can be better prepared for retirement.

High return investments are often referred to as risky assets. Hanna, Wang, and Yuh (2010) referred to high return investments, though other authors (e.g., Friend & Blume, 1975; Gutter & Fontes, 2006) have referred to risky assets.

The Capital Asset Pricing Model (CAPM) assumes there is a tradeoff between risk and return, because investors are rewarded with higher returns for assuming risk (Sharpe, 1964), so "high return investment" is almost the same as "risky investment." One way of classifying which investments are high return is using historical mean rates of returns and standard deviation of each asset as criteria. Assets with high returns and high volatilities have been classified as high return investments (Embrey & Fox, 1997; Gutter, Fox, & Montalto., 1999; Gutter & Fontes, 2006; Hanna, et al., 2010). Stocks and business assets have been commonly classified as high return investments, but there have been differences in classifying bonds and real estate assets as high return investments. However, bonds in general have less volatility than stocks. Although some types of bonds (e.g., corporate, junk, and foreign government bonds) might potentially be referred to as high return investments considering our definition of high return investments based on historical mean returns and standard deviation, it is difficult to identify riskier types of bonds households own in publicly available datasets such as the Survey of Consumer Finances (SCF). In addition, stocks in aggregate have performed better than bonds over the long term. …

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