This Asset Holdings, Disparities By Race/Ethnicity Essay example is published for educational and informational purposes only. If you need a custom essay or research paper on this topic, please use our writing services. EssayEmpire.com offers reliable custom essay writing services that can help you to receive high grades and impress your professors with the quality of each essay or research paper you hand in.
Demographic and socioeconomic characteristics are related to which assets households own. Levels of income and wealth, age, educational attainment, gender, health, household structure, ethnicity, culture, and attitudes toward financial risk taking are some of the heterogeneous characteristics that explain participation in different asset classes. When comparing asset participation of the majority of the population with that of minority groups as identified by race or ethnic background, disparities are partly due to socioeconomic disadvantage and cultural differences.
Overview Of Household Asset Ownership
Household portfolios tend to be very simple, with most households holding fewer than five assets, which tend to be safe assets like transaction accounts, savings accounts, term/time deposits, and life insurance. Participation rates in other financial assets like bonds and life insurance vary greatly between countries, because of differences in public policy, cultural norms, and the availability of such financial products. Likewise, participation in share markets depends on the cultural norms and the strength of the market, and often, the privatization of publicly owned assets can increase household investment in shares. However, those households that hold shares often hold only a few shares of domestic origin. Again, public policy plays a role in share ownership, as retirement savings accounts often are composed mostly of shares.
Nonfinancial assets like the primary residence and investment property are likely to dominate the household’s asset portfolio in terms of their relatively high acquisition prices and indivisibility. Home ownership is prioritized by many households as it serves a dual purpose (accommodation and investment), though its expense tends to “crowd out” investment in other assets. However, participation rates differ across countries, which may be due to public policies (whether the family home or investment property attracts tax advantages) and cultural factors (the dream of home ownership). Likewise, ownership of a business seems to be prioritized by some groups but not others, with some countries exhibiting much higher rates of ownership than others.
The wealth effect has one of the most significant impacts on the financial decisions of households. The capacity for households to hold assets is largely determined by their levels of wealth and income, as they first seek to satisfy their consumption needs before they are able to save and invest. Therefore, households at the lower bounds of income and wealth distribution usually hold few assets, and these usually include bank accounts, vehicles, and perhaps even a family home. Conversely, wealthier households are more likely to hold asset classes not commonly held by the majority of the population, such as cash investments, life insurance, trust funds, businesses, and collectibles, and thus they hold more diversified portfolios.
The wealth effect and its impact on household portfolios operate through multiple, highly correlated channels. The first is that increased levels of wealth allow a household to better overcome the costs associated with buying and holding assets. This includes the cost of collating and disseminating the information required to make decisions, like advice from accountants and financial planners.
Second, wealthy households are more likely to be older, because of the hump-shaped pattern of income over a finite life, meaning that the young and the old dissave and wealth accumulation is highest for the middle-aged, as they are at their peak earning capacity. For example, younger households tend to own savings products, early-to mid-career households tend to overinvest in housing, preretirement households tend to hold shares as well as other investment assets, and retirees tend to divest themselves of the most risky assets and hold on to housing for longer than expected.
Particular cohort groups may exhibit different patterns of asset ownership based on their experiences or cultural differences. The generation that experienced the Great Depression, for example, are less likely to invest in shares, and the baby boomer generation (born between 1946 and 1966) may have a higher propensity for property investment than other cohorts. Cultural norms are also country dependent; for example, it has been found that rates of share ownership are higher among young U.S. households than among young British households.
Inherent in aging is household structure changes, which can have a major effect on the portfolio decisions of households. Generally, the household structure transitions during the life cycle from a single-person to a couple for young-adult households and then to married couples with children, and in the later stages, older couples return to single-person households. Of these life cycle stages, the child-rearing phase negatively affects the accumulation of wealth, and the greater the number of children, the more wealth is decreased. This may be due to child-rearing expenses or the cost of trading up housing, or because larger families are associated with lower educational attainment and hence lower income and wealth. However, a couple-with-children household increases the probability of owning the principal residence and having a mortgage, and having up to two children increases the probability of owning a secondary residence. It is interesting that being married in itself enhances the accumulation of wealth, which is greater than just the summation of two incomes. As would be expected, divorce has a negative impact on household wealth.
Third, wealthy households are also better able to afford both the cost of education, particularly tertiary education, and the opportunity cost of forgoing income while training is taking place. This can be directly linked to wealth because people expecting higher future earnings acquire more expensive houses and borrow more. Moreover, a large number of educated households are better able to acquire information associated with equity and bond market participation and are more aware of the associated risks. As wealth has an inherited component, it can be used to enhance future prospects of adults and children alike (i.e., invested in education).
Fourth, wealthy households are likely to earn higher working and investment incomes, which may be due to the members being older or having a higher level of education, or other reasons. Those with higher incomes are more likely to be able to save and have access to credit to buy wealth generating assets. Income is important not only in relation to debt serviceability but also because of its contribution to the acquisition of financial literacy skills through learning to make long-term decisions. Share ownership, in particular, has been shown to be lacking in households with low wages, which may be a compounding effect because of associated lower levels of education and financial literacy. Furthermore, households with future income uncertainty, like those with health issues, those that own their own business, and older households, with higher risk of mortality, avoid risky assets like shares.
Fifth, wealth is related to a preference for financial risk taking. The preferences of households for financial risk taking exert a major influence on household financial decision making and thereby the composition of household portfolios and, concomitantly, wealth outcomes. Households demonstrate behavior changes in relation to risk attitude at each tail of the wealth distribution. At the higher bound, once a certain level of financial security is reached, individuals feel that they can tolerate more financial risk, and at the lower bound, individuals with negligible wealth tolerate financial risk; as they accumulate savings, they are less inclined to tolerate risk. The middle percentiles of the wealth distribution are generally risk averse. The consequence of this wealth–risk aversion relationship is that a majority of households are risk averse and prefer to hold only safe assets such as savings deposits and government bonds. The investment in risky assets such as shares and businesses is much more likely to be confined to wealthier households (although those with businesses tend to avoid equity investment in order to reduce the portfolio risk they are exposed to by being heavily overweighted in their businesses).
Higher risk tolerance is also found among households with some savings, higher levels of education, or a single male member; it also generally increases with age until retirement (around 65 years), and thereafter it decreases. The risk aversion of older households may be due to the many uncertainties they face, including health and mortality risks, and where older households do hold risky assets, the bequest motive has been a strong determinant. Women are consistently more risk averse than men, across many methodologies and contexts and even when controlling for the effects of other individual characteristics such as age, education, and wealth. The consequences are that women, who tend to earn less, spend more time out of the workforce, and have longer life spans than men, are further reducing their pool of retirement savings by excluding themselves from the potential higher returns of risky asset investments and thereby reducing overall wealth accumulation.
Finally, wealth has a positive but small effect on the degree of financial knowledge, which may be attributed to increased goal setting and planning activity among those with higher levels of financial literacy. Interestingly, those who have a financial goal are more risk seeking than those without a financial goal. Those with higher levels of financial knowledge also make financial decisions to take advantage of tax incentives associated with investment in particular assets. Individuals who demonstrate higher levels of financial literacy also tend to have higher levels of portfolio diversification, although this may also lead to overconfidence, aggressive investing, trend following behavior, and local bias. Those with low financial literacy levels are more likely to be women, those on low incomes, and those with low levels of education, and they tend to avoid equity investments. Low levels of financial literacy also cause people to overweigh their decisions based on recent events, like bull and bear share markets. The consequences of low levels of financial literacy and the resultant financial decisions mean that the returns earned fall short of the theoretical returns that could be earned by well-informed, disciplined investors.
In sum, the financial decisions of households depend on their heterogeneous characteristics, especially wealth and income, age and education, and also household structure, gender, preference for financial risk taking, and levels of financial literacy.
Disparities In Asset Holdings By Race/Ethnicity
Differences in asset holdings that can be significantly attributed to nationality or ethnic background may result from an amalgam of historical, political, economic, and religious influences, which are difficult to measure and identify separately. However, disparities in asset holdings according to race or ethnicity have been identified by comparing majority populations with minority groups using countrywide survey data.
The literature available is concentrated in the United States, which shows major disparities between the assets owned by whites, blacks, and Hispanics. Although Hispanic households constitute more than 9 percent and blacks more than 12 percent of all households, their combined wealth represents only 3 percent of the total household wealth, and their net worth is 10 to 12 percent below that of white households. Black households are generally the least wealthy and are less likely to own their own home and hold financial assets, like stocks and transaction accounts, investment accounts, and retirement accounts, than their white counterparts. Furthermore, those who are homeowners generally own homes in areas with low rates of value appreciation. White households have been found to be twice as likely as black households to own risky assets like stocks and businesses, which allows white households the opportunity to acquire wealth more quickly than nonwhite households. Much of the lower socioeconomic status of black households in the United States can be attributed to past racial inequality, including segregation and labor market discrimination, which has resulted in less valuable intergenerational transfers than in white households.
The low socioeconomic status of nonwhite households in the United States also affects educational attainment, and vice versa. As nonwhite households hold fewer assets, there is less investment in their education or their children’s education. Indeed, black households with low educational attainment are less likely to hold any financial assets, while those with a college degree are more likely to. Financial assets are likely to be important resources for educational investment as they are highly liquid. For those nonwhite households with investment in nonfinancial assets (i.e., family home), there are significant increases in participation in gifted programs, extracurricular activities, and college attendance and graduation. Additionally, ownership of nonfinancial assets may provide collateral for borrowing or may be indicative of good money management and a higher standard of living (quality of home, neighborhood, and facilities). Children of households that do not invest in assets, particularly financial assets, are less likely to invest themselves.
The higher rates of young parenthood and nonmarital births, greater prevalence of single-parent families, and larger family sizes among blacks also mean that the capacity to save is further restricted, investment in their children’s education is limited, and inheritance is divided among more heirs, having an intergenerational wealth impact. Studies have shown that the presence of children in black and Hispanic households is associated with financial harm, while children in white households are associated with increases to net worth.
Hispanics in the United States also experience wealth inequality, although their circumstances differ from those of blacks. Limited English proficiency has restricted occupational opportunities and hence lowered income. Hispanics may also remit financial resources back to their family members elsewhere. However, entrepreneurship features in the accumulation of wealth among Hispanics, which may lead to increased wealth generation.
Other studies in the United States have focused on Asian minority groups. Generally, Asian immigrants participate significantly less in financial markets than native-born U.S. citizens. More specifically, Indian and Chinese immigrants are more likely to own financial assets, while Vietnamese immigrants are not. Indian and Korean immigrants have higher levels of business asset ownership. Korean and Filipino immigrants are also more likely, while Indian immigrants are less likely, to be homeowners.
The attitude toward financial risk taking also differs significantly by ethnicity, which affects the household’s asset allocation decisions. Blacks and Hispanics have been found to be less risk averse than whites in the United States, and more willing to take substantial risks. In addition, studies of Asian immigrants show that Indians, Koreans, and Chinese immigrants are less risk averse than Filipino immigrants in the United States. As well as the factors mentioned above that determine risk attitude (wealth, savings, gender, age), these differences in risk attitude found in minority groups could be attributed to information availability, as financial companies may prefer to target white households with marketing of investment products and minority households may have less trust in financial institutions because of experiences with discrimination. As a consequence, share ownership by blacks and Hispanics is significantly lower than by whites. Furthermore, share ownership rates of minority households (compared with whites) decreased significantly after a market downturn, indicating inexperience with or lack of comfort in long investment horizons and susceptibility to actualizing losses.
Other nationalities and religious affiliations (which can be associated with geographic location) also identify with particular attitudes to financial risk taking. By nationality, Germans are generally more risk averse than many other developed nations; Spanish MBA students are less risk averse than American MBA students; and Chinese students are less risk averse than U.S. students. By religion, those with a religious affiliation of any sort are significantly less risk tolerant than atheists, who seek profits and are willing to assume risk. People affiliated with a religion with strict behavioral rules, for example, Muslims, have higher levels of risk aversion.
In summary, the asset holdings of households differ by race/ethnicity primarily because of the significant impact of wealth and associated factors (income, education) on asset allocation decisions. Furthermore, cultural differences of minority groups, like family size or attitude to financial risk taking, further exacerbate wealth inequality and, hence, asset ownership.
- Bartke, Stephan and Reimund “Risk-Averse by Nation or by Religion? Some Insights on the Determinants of Individual Risk Attitudes.” SOEP Papers on Multidisciplinary Panel Data Research, v.131/1 (2008).
- Bowman, Scott. “Multigenerational Interactions in Black Middle Class Wealth and Asset Decision Making.” Journal of Family and Economic Issues, v.32/1 (2011).
- Campbell, Lori Ann and Robert Kaufman. “Racial Differences in Household Wealth: Beyond Black and White.” Research in Social Stratification and Mobility, v.24/2 (2006).
- Hanna, Sherman and Suzanne Lindamood. “The Decrease in Stock Ownership by Minority Households.” Journal of Financial Counseling and Planning, v.19/2 (2008).
- Kim, Jinhee, Swarn Chatterjee, and Soo Hyu Cho. “Asset Ownership of New Asian Immigrants in the United States.” Journal of Family and Economic Issues, v.33/2 (2012).
- Oliver, Melvin L. and Thomas Shapiro. “Black Wealth/ White Wealth.” In Great Divides: Readings in Social Inequality in the United States, Thomas M. Shapiro, ed. New York: McGraw-Hill, 2006.
- Yao, Rui, Michael S. Gutter, and Sherman Hanna. “The Financial Risk Tolerance of Blacks, Hispanics and Whites.” Journal of Financial Counselling and Planning, v.16/1 (2005).