Racial/Ethnic Differences in High Return Investment Ownership: A Decomposition Analysis

By Hanna, Sherman D.; Wang, Cong et al. | Journal of Financial Counseling and Planning, July 1, 2010 | Go to article overview

Racial/Ethnic Differences in High Return Investment Ownership: A Decomposition Analysis


Hanna, Sherman D., Wang, Cong, Yuh, Yoonkyung, Journal of Financial Counseling and Planning


The racial/ethnic disparities of risky asset ownership were investigated. In the 2004 and 2007 Survey of Consumer Finances datasets, 30% of Hispanic, 36% of Black, and 65% of White households had high return investments such as stocks, investment real estate, or private business assets. Logistic analysis shows that Black and Hispanic households are much less likely to have high return assets, even after controlling for other factors such as education. However, Blinder-Oaxaca decomposition analyses show that if Black households had the same characteristics, including risk tolerance, as White households, they would have the same ownership rates for high return investments, and the gap between Hispanic and White households is much smaller than implied by standard logistic regression.

Key Words: decomposition analysis, individual investing, portfolio allocation, racial/ethnic differences, Survey of Consumer Finances

Introduction

A number of studies have examined racial/ethnic differences in wealth in the U.S. with most studies examining the gaps between White households and minority households (Barsky, Bound, Charles, & Lupton, 2002; Blau & Graham, 1990; Sharmila, 2002; Smith, 1995; Wolff, 1998). The lower wealth levels of minority households might be partly related to differences in ownership of high return investments (Keister, 2000). Investment in risky, high return assets is an important factor in future economic well-being of households, especially in terms of potential retirement adequacy. White households have much higher stock investment ownership rates than minority groups, even after controlling for income and other factors (Schooley & Warden, 1996; Wang & Hanna, 2007; Zhong & Xiao, 1995).

Stock assets, including individual stocks and stocks included in mutual funds, are the most common high return assets owned by U.S. households (Bucks, Kennickel, Mach, & Moore, 2009). Stocks have a high volatility but much higher return than other financial investments (Morningstar, 2007). In addition to stock investment ownership, investment real estate and business ownership are often included in the category of owning risky, high return assets. Unlike stock investments, it is difficult to estimate the rate of return and standard deviation of investment real estate in general because of the diversity of these investments. Between 1972 and 2006, the rates of return for equity Real Estate Investment Trusts (REITS) were higher than large company stocks (i.e., the S&P 500 stock index), 14.5% versus 11.4% (Morningstar, 2007, p. 59). Business ownership might plausibly be assumed to have a higher expected return than stocks of publicly traded small companies with correspondingly higher risk levels (Lai & Hanna, 2004). Bond investments are sometimes assumed to be high return investments, based on having higher mean returns and standard deviations than cash equivalent investments. However, based on the much lower inflationadjusted mean arithmetic return of long-term corporate bonds compared to stocks (Morningstar, 2007, p. 120), it seems reasonable to exclude bond investments from the high return asset category. During the 1926 to 2006 period, bonds were substantially inferior to stock investments for building wealth. One dollar invested at the beginning of 1926 would by the end of 2006 have turned into an inflation- adjusted value of $273 in a hypothetical large stock fund, $1,414 in a small stock fund, $9 in a corporate bond fund, and $6 in an intermediate government bond fund (Morningstar, 2007, p. 105).

Hanna and Chen (1997) concluded that all households should have stock investments, though the time horizon (and therefore age) should be important in determining the portfolio allocation to stocks, as well as other components of household wealth, including human capital and net home equity (Delaney & Reichenstein, 1996). Haliassos and Bertaut (1995) noted that there are fixed monetary and information costs to investing, so low income households might be rational in not holding stocks. …

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