Investment Planning & Financial Trends

As the economy gets tighter, Blacks are thinking ahead and investing in real estate, stocks and a host of savings vehicles. In fact, says Valance Williams, vice president of investments at the Maxim Group, a financial firm in New York, while the percentage of Blacks investing is relatively low compared with other ethnic groups, “It is rising rapidly.” More Blacks are “engaged in good financial planning,” notes Williams. “And Blacks are becoming more comfortable using Black financial professionals.”

Blacks indeed are becoming more financially savvy but still have much catching up to do, says Dwayne Redmond, director of Merrill Lynch’s African-American Business Development. “You hear a lot about the $700 billion-plus ‘buying power’ of African-Americans. While that sounds impressive, the real focus needs to be on savings and investing,” he says. “While African-Americans are increasing their emphasis on wealth building, we have a long way to go.”

Blacks in the United States haven’t had a long history of investing, and those who invested did so conservatively, Redmond adds. “African-Americans still have significant financial challenges, including low household income, proportionately low ownership of assets, low rates of inheritance and poor estate planning,” he notes.

That picture appears to be changing. An October 2004 study by the Boston College Center on Wealth and Philanthropy estimates the value of Black-owned assets at $1.6 trillion, or $1.1 trillion in net worth. Wealth in the Black community has risen at a 4 percent compound annual growth rate from 1992 to 2001, the study says. According to International Demographics Inc., a consumer research firm in Houston, Texas, more than 1.3 million Black households have income of $100,000 or greater.

Where We Invest
The 2005 Ariel Mutual Fund/Charles Schwab Black Investor Study shows 65 percent of Blacks own stocks or mutual funds, up from 57 percent in 1998. In the same study, 39 percent of Blacks vs. 30 percent of whites said they are likely to invest in stocks or mutual funds over the year. The study also shows that in the 1990s there was a steady increase in stock ownership among Blacks, although it has dipped since 2000. In 2002, 74 percent of Black households with incomes of more than $50,000 owned stocks. In 2003, that figure slid to 61 percent, but rose to 68 percent in 2004.

The stock market isn’t the only game in town for Blacks. Sixty-one percent of Blacks in the Ariel/Schwab study, against 51 percent of whites, consider real estate a better investment than stocks or mutual funds, while just 28 percent of Blacks compared with 38 percent of whites cited stocks or mutual funds as the best investment overall. It was the first time that the annual study showed a majority of both Blacks and whites favoring real estate over all other investment categories combined. “As a group, African-Americans have a large portion of their net worth tied up in home equity versus stocks. While home equity is great, it is a paper asset and isn’t ‘invested,’ ” offers Redmond.

Williams sees another trend: “Some people have been aggressive with long-term care and there has been a growing realization that one has to prepare for future educational needs,” he says. Typical nonmarket investment instruments are:

• Life insurance—term, whole life (or permanent) and variable life policies.
• Retirement savings plans, such as 401(k)s, in which, through your employer, part of your salary is invested before taxes.
• Individual retirement accounts (IRAs)—you can open an IRA even if you participate in an employer-sponsored retirement plan, as long as you have an adjusted gross income below $50,000, if you’re single, and below $70,000, if you’re married. You can contribute as much as $3,500, and it may be tax deductible, depending on your adjusted gross income.
• Coverdell Education Savings Accounts, formerly Education IRAs, are a tax-advantaged way to save for a child’s education. Individuals with an adjusted gross income of $110,000 ($220,000 for joint filers) can contribute to a Coverdell account. The nondeductible contributions in these accounts usually grow tax free.
• Section 529 Plan—a savings program to help families meet higher education expenses. Annual contributions can be up to $11,000 for individual filers, $22,000, for joint filers.

Getting Started
Investment strategists offer the following advice for getting started.

Have a healthy attitude about investing.
“African-Americans need to emphasize savings and investing versus spending,” says Redmond. “This includes savings for short-term needs and long-term needs, whether it is saving for a home purchase, college, retirement, or long-term care.”

You don’t have to be an expert; you can hire one or join an investment group.
The Ariel/Schwab study found “a new psychological barrier” that significantly contributes to underinvestment by African-Americans: “The misperception that investors need to be skilled at market timing, or buying and selling stocks at exactly the right time, in order to be successful.” Twice as many Blacks as whites (30 percent vs. 15 percent) consider “knowing how to time the market” more important than “being disciplined enough to invest regularly” or “being patient enough to see an investment through to the long term,” the study says. Blacks citing patience or discipline as important for success in investing were “two and a half times more likely to participate in the market than those believing in the market-timing myth,” it says.

Look at a wide variety of investments and find what’s right for you.
“There needs to be an increased emphasis on savings and investment strategies to diversify portfolios beyond real estate and into managed accounts that include bonds and equities, domestic and international. This will allow African-Americans to take advantage of the broader markets,” Redmond says. “For those having a retirement program at work, they need to be sure to maximize their contributions to take advantage of company matches and tax-deferred growth. Company retirement programs are the best way to gain exposure to the market and begin systematic investing—allowing you to dollar-cost-average into the market vs. attempting to time the market,” he adds.

Immerse yourself in information.
With the explosive growth of Internet tools, media emphasis on wealth building and a host of other information outlets, African-Americans have more opportunity for exposure to wealth-building strategies than ever before, says Redmond. Investing for Success (www.ici.org/i4s/), an educational program sponsored by the National Urban League, Hispanic College Fund and the Investment Company Institute Education Foundation helps minorities become knowledgeable about investing. “Our workshops focus on two objectives: (1) Becoming an informed investor, and (2) Planning for long-term goals. We cover the importance of setting goals, understanding risk, asking questions, taking the long-term view, and saving and investing for retirement and college,” says Denise Murray, director of investor education programs at Investment Company Institute. Making your money work for you isn’t as hard as you think.

By Ann Brown