A recent University of Michigan study suggests that the percentage of U.S. families who own stocks dropped from 30 percent in 2001 to 18 percent in 2011. Preliminary 2013 studies suggest the percent ownership is now 16. Further research suggests that participants who drop out of the market typically do so because of financial distress, frequently increased in recessions.
This concerns us because the people who need to participate in the stock market the most, lower and middle income workers, are the very people inclined to not participate at all or minimize participation. Wages are stagnant and jobs are scarce. These households desperately need to supplement their earnings. The economic gains of the past six years were in the stock market and those not invested have missed out.
If you need reasons to invest, we’ve compiled this list of five to do so.
Diversify Your Ability to Grow Your Net Worth
Even with a good job and income it’s hard to increase your net worth simply by saving. Because the Fed has kept interest rates so low for so long and will for the foreseeable future, it’s impossible to have any gains from saving in a traditional bank saving account.
Over the last ten years, the S&P 500, an index of 500 large capitalization companies you’re likely familiar with, have increased 8.18 percent. That means, $1,000 invested in an S&P index mutual fund would have grown to $2,195 with no additional contributions.
Supplement Your Income
Face it, wage increases and raises aren’t coming back anytime soon. Harvard released a study that suggests that the job market and wages may not improve in the near future. A recent survey of U.S. employers showed that they plan to increase wages by as much as 3 percent in 2015. That’s well and good, but inflation is running at 2.1 percent and future plans to increase wages often don’t materialize. 3 percent minus 2.1 percent means a projected real-wage increase of 0.9 percent.
The overall stock market has grown 150.8 percent since 2009. Stock market investing can supplement income that’s barley enough to survive. If you’re still working, these gains will help you in retirement later in life or help you pay for short-term financial needs such as a car or down payment on a house. If you’re currently not working, investments in dividend paying stocks lessen the financial squeeze.
Reduce Your Employment Risk
It’s true that the official unemployment rate is currently 6.1 percent, but this doesn’t factor the percentage working age individuals who have dropped out of the job market for one reason or another. The more accurate U6 unemployment rate, which does factor in these disengaged workers, was 12.0 percent in August. The concern is that there may not be a need to bring these people back into the workforce because of technological advancements and cheaper labor abroad.
To reduce the consequences of a job loss, stock investments that beat the rate of inflation can be liquidated within three business days and used to get you by in a tight squeeze. This isn’t the most ideal situation, but it’s a tool that exists.
An even more ideal situation is to have an emergency savings account invested in a money market mutual fund or other cash equivalent to use before you need to sell stock. Of course, having either option is better than having no option.
Reduce Your Taxes
If you have a job and can participate in a company sponsored retirement account, your contributions to these retirement accounts are made with pre-tax dollars. This means you are not taxed on the amount you contribute to this account. As many investment professionals and Occupy Wall Streeters claim, the rich make a lot of financial gains by avoiding taxes.
Outside of company sponsored retirement accounts, there are tax advantaged investments that you can add to your portfolio. Such investments include municipal bonds, Master Limited Partnerships (MLP), real estate related investments and index tracking ETFs that defer tax payments until liquidation.
As a former boss of mine says, “Find out what successful people do and do that.” If financially successful people reduce and eliminate their tax responsibility, do the same.
Inflation is the silent killer of wages. As we mentioned earlier, a 3 percent wage increase only yields a real increase of 0.9 percent after inflation. The best way to increase your real income without working longer or harder is by investing in the stock market. With stock market growth over the last ten years at 8.18 percent, it’s the only way to make financial strides that a paycheck won’t.
Of course, we understand that everyone can’t invest because of low incomes and stagnant wages. Take an honest look at your spending habits and assess if there is room for improvement. If there is, then any “found money” can be put into the stock market. Some mutual funds will allow you invest as little as $25 a month. Any little bit helps and everyone has to start somewhere.