Last month, The Motley Fool posted a beautiful video titled "Why Do You Invest?"
"Is it for the fancy cars? The dream home?" the ad asks. "Maybe we invest for our families," it ponders, a reason I think most investors would agree with.
But there's a related question for millions across the country: Why don't you invest?
About 54% of U.S. households own stock investments, according to a 2011 Gallup poll. That leaves 46% that do not.
Part of this is due to a lack of wealth -- many American households simply don't have any money to invest. But there's more to it. A 2008 paper by a trio of economists showed that (link opens PDF file) sizable numbers of even the wealthiest Americans don't own stocks. Of households ranked in the third quartile of wealth, 34% did not own stocks either directly or through mutual funds. Of those in the top quartile, 14% had no stock exposure. Within the richest 5% of American households, 6% owned no stocks.
Some of the wealthiest households may avoid stocks because ownership in private businesses offers better opportunities. But for others, the excuses are more interesting.
Two centuries of data makes one point clear: Over the long haul, stocks trounce the returns of bonds, cash, commodities, and real estate -- and they do it with less risk. Adjusted for inflation, $1 invested in stocks in 1802 was worth $755,000 in 2006. In bonds, $1 turned into $1,083. Gold grew to $1.95. Cash depreciated to $0.06. During that 200-year stretch, the worst 20-year period for stocks produced a real return of 1% a year. For bonds, the worst period eroded half of investors' purchasing power. Stocks win over the long haul, and yet a large number of Americans avoid them.
Why is hard to know, but not particularly surprising. Americans' love for self-destructive financial behavior is never-ending. One incredible 2005 report (link opens PDF file) led by Yale economist James Choi showed that half of workers over 59.5 years old -- and hence eligible to withdraw money from a 401(k) plan right away -- do not contribute enough to retirement plans to take full advantage of employer matching, turning down money that would have been theirs to spend immediately. Two-thirds of those over 59.5 years old not participating in a retirement plan with employer matching said they would never sign up. It's astounding, as they could have pulled the money out the next day penalty-free.
Choi's paper doesn't detail attitudes toward stocks, but his results speak volumes about people's attitudes toward money in general. When something requires a modicum of effort, many Americans decline -- even if it offers substantial rewards. Our aversion to paperwork can be stronger than our desire for money.
Past performance also guides people's willingness to own stocks. While 54% of households currently own stocks, that figure was as high as 65% in 2007 when the market hit an all-time high. As USA Today wrote in 2005:
In 1996 and 1997, when the bull market was in full swing, Washington [state] gave its teachers an option of staying in the traditional pension plan or switching to a hybrid pension plan -- 50% of assets in a traditional pension and 50% in a private account. Seventy-four percent opted for the hybrid plan. But when public employees were offered the same choice in 2002 and 2003, after the slump, only 11% chose the hybrid offering.
Those who do invest in stocks tend to do miserably at it, reinforcing their perception that it's a losing game. One study by Dalbar showed that (link opens PDF file) the S&P 500 returned 9.14% a year over a 20-year period ending 2010, but the average investor earned 3.83% a year by buying high and selling low. Stocks crush bonds over the long run, but many would be better off in bonds so long as they stay put. They're that bad at investing.
Then there's the fear of being cheated. The same three economists mentioned above wrote a great paper (link opens PDF file) in 2008 asking a group in the Netherlands a simple question: "Generally speaking, would you say that most people can be trusted or that you have to be very careful in dealing with people?"
The question has nothing to do with stocks, but it was highly significant in predicting stock ownership. "Trusting others increases the probability of buying stock by 50% of the average sample probability and raises the share invested in stock by 3.4% points," the authors wrote. The results "explain the significant fraction of wealthy people who do not invest in stocks." The study is likely applicable to the United States.
Another possibility -- though one I don't have evidence for -- is that people willingly forego higher long-term returns to avoid the nausea of stock volatility. Academic economists tend to view people as unemotional "utility maximizers" for whom rational behavior equals whatever is most efficient, but the real world is different. Trading a percentage point of returns for a better night's sleep may be worth it for those who value a peaceful life over a large net worth. What looks irrational on the chalkboard often makes sense in the real world.
With pensions a dying relic, more Americans are now responsible for financing their own retirements. For most, the only way to get there is heavy exposure to stocks over many years. Will those now shunning stocks eventually change their minds? Will they ever get to retire? It's hard to know. Never underestimate people's willingness to undermine their future.
For more like this, check out my latest e-book, 50 Years in the Making: The Great Recession and Its Aftermath, on Amazon for your Kindle or iPad. It's short, packed with information, and costs less than a buck.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.