Asset Holdings, Disparities By Race/Ethnicity Essay

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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.

Bibliography:

  1. 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).
  2. Bowman, Scott. “Multigenerational Interactions in Black Middle Class Wealth and Asset Decision Making.” Journal of Family and Economic Issues, v.32/1 (2011).
  3. 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).
  4. Hanna, Sherman and Suzanne Lindamood. “The Decrease in Stock Ownership by Minority Households.” Journal of Financial Counseling  and Planning, v.19/2 (2008).
  5. 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).
  6. 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.
  7. 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).

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