Quantifying Investors’ Affection for Stocks

Motherhood and apple pie are still big in Americans’ hearts. But for almost half of all households, the stock market has a special place in their wallets.

A survey released Thursday shows that 48.2% of U.S. households own stocks, either indirectly through mutual funds, or directly.

That’s up from 19% in 1983, just after the long-running bull market got underway, according to the study by the Securities Industry Assn., a Wall Street trade group, and the Investment Company Institute, which represents the mutual fund industry.

An estimated 78.7 million individual Americans own stocks or stock funds, an almost 86% jump from 42.4 million in 1983.

The report quantifies what economists have assumed for a long time: that a growing number of Americans have a stake in the market, a phenomenon that has helped to propel the record bull market but that some experts worry could hurt the economy should stocks fall for an extended period.

Including retirement accounts, stock and stock mutual fund holdings now make up 34.9% of the typical household’s financial assets (that is, all savings other than home equity), up from 17.2% in 1980 and the highest percentage in the post-World War II era, the survey found.

Other financial assets would include things such as bank savings and bonds.

The report paints a picture of Americans as educated and committed investors who are saving primarily for retirement. The typical stock investor is 47 years old with a household income of $60,000 and total financial assets of $85,000, according to the survey.

“Equity owners are long-term investors,” said Sandy West, an ICI assistant vice president. “They have received the message of buy-and-hold.”

Stock ownership has clearly been a boon for Americans during the 1990s as the Dow Jones industrial average has surged 274%. Rising stock values also have stoked the economy by helping Americans to boost spending on everything from cars to vacations, a phenomenon known as the “wealth effect.”

Every $1 increase in a stock portfolio translates into four cents of spending by a consumer over the following two years, said Sung Won Sohn, chief economist at Wells Fargo & Co. in Minneapolis.

But some experts worry that a protracted market slide would have the opposite effect, exacerbating any economic downturn by making people feel much poorer. Studies show the “reverse wealth effect” causes people to slash spending by seven cents to eight cents for every $1 decline in their stock portfolios, Sohn said.

Experts have long debated whether individuals will sit tight during a bear market--the last of which was in 1990 by official measures. Individuals “bought the dips” during market downturns in late 1997 and ‘98, a strategy that paid off when stocks quickly rebounded.

But experts aren’t sure investors will stick around in a lengthier and more severe drop.

“Certainly some will, but many of them will flee if it doesn’t bounce back [quickly] from a correction,” said Jeremy Siegel, author of “Stocks for the Long Run,” a book that espouses buy-and-hold investing. “It’s not the first dip that worries me. It’s the second.”

Rosanne Cahn, chief equity economist at brokerage Credit Suisse First Boston, disagrees. “Consumers have made so much money in common stocks in the last decade that even if stock prices go down 15% or 20% and stay down for six months, they’ll still feel pretty comfortable in their retirement objectives,” she said.

The study was conducted in January and February and surveyed 4,842 households and an additional 393 people with high net worths. Among the findings:

* Median portfolio size is $50,000, but stock assets vary widely. Seven percent of households have stock assets exceeding $500,000, while 3 in 10 have less than $25,000.

* Eighty-seven percent of people claim to follow a buy-and-hold philosophy, but 19% said they “like to cash out” investments that have made short-term profits. Sixty-six percent said their primary financial goal is saving for retirement.

* Members of Generation X--which the study defines as people between 19 and 35 years old--are more aggressive investors than baby boomers--those 36 to 54. Gen-Xers have 80% of their financial assets in stocks, compared with 57% for boomers.

* Fifty-four percent of stock and stock-fund holders made their first investments before 1990; 28% between 1990 and 1995; and 18% after 1995.

* Eighty-five percent of households own stock funds, and 54% own individual equities.

* Almost half of individual-stock owners bought or sold securities last year, compared with slightly more than 1 in 3 for mutual fund holders.

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U.S. Stockholders: A Snapshot

Older people own much more stock than younger people, a new survey confirms, but younger people are much more heavily invested than their elders when it comes to stock holdings as a percentage of total financial assets (all non-home-equity savings).

Story: C12

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Pctg. of Median financial stock assets Age group holdings in stocks Generation X $20,000 80% (19 to 35) Baby boomers $50,000 57% (36 to 54) Silent generation $85,000 43% (55 to 74) GI generation $74,000 37% (75 or older)

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Note: “Stock holdings” is defined as individual stocks and mutual funds.

Source: Securities Industry Assn. and Investment Company Institute

Why They Own, and What They Know

Most individual investors have bought stocks for retirement-savings purposes, a new survey shows. And most investors consider their understanding of individual stocks either “limited” or “basic.”

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Sources: Securities Industry Assn. and Investment Company Institute