More than two-thirds (67%) of African-Americans are now investing in the stock market, according to Ariel Investments’ 2015 Black Investor Survey, released this year. That’s not the all-time high in percentage terms. But it’s up 7 percentage points from Ariel’s last such survey in 2010.
Will this uptrend continue? To get answers, IBD spoke with Mellody Hobson, president of Chicago-based Ariel Investments, an African-American-owned mutual fund company with more than $10 billion under management. Hobson is also chairman of the board of trustees of Ariel Investment Trust and board chairman of DreamWorks Animation SKG Inc.
IBD: In your surveys, stock investing by African-Americans, as a percentage, peaked in 2002, then generally slid until perking up in 2015. What’s been causing the swings?
Hobson: The market’s dot.com period had been a remarkable time for investors. But when that bubble burst, the result was dramatic: It threw novice, first-time, African-American investors out of the market, and people who had gotten burned became leery of stocks. Since then, there’s been a return to the market, especially via the growth of automatic enrollment in 401(k) plans.
IBD: From here, will stock investing by African-Americans be growing more consistently?
Hobson: With the wide use of auto enrollment in 401(k) plans, my gut instinct is yes. And millennials are likely to be a big part of this.
But there are cultural issues — we’ve identified five of these — that have been holding us back. These include limits on market knowledge; misinformation — such as you have to be wealthy to be an investor; and serious issues about trust in the market and fraud. African-Americans have also lacked the context to figure out how to get actively involved, and as first-time investors, we (the African-American community) tend to invest very conservatively. For instance, we consider buying a CD to be investing. These factors make it hard to catch up soon to the level of stock investing by whites (at 86% of respondents in 2015, according to Ariel’s survey).
IBD: However, your data show African-Americans are noticeably more optimistic than whites (75% vs. 50%) about the economy and more bullish on the stock market (65% versus (53%). Why?
Hobson: It comes down to expectations: Traditionally, we’ve had lower expectations than whites. That’s left us with more room for growth in this area: If you’ve faced discrimination, or fewer opportunities, you can be discouraged, or you can hope that things will get better. We tend to hold out hope.
We’ve always been rooted in the idea that things will get better. We’ve been religious, and the church has always been a big factor in our lives. So if you overlay that with our views on the economy and bullishness, you’ll find they’re consistent.
IBD: Do you think the recent violence in this country dims this optimism?
Hobson: The African-American community would say that this has been going on a long time. As blacks we were taught about discrimination as children. It’s just that recent events have made the lingering problems more evident to whites.
But I don’t think it puts our (positive) attitudes on hold because the undercurrents have always been there.
IBD: Speaking of optimism and bullishness, your survey shows stocks are now African-Americans’ top-choice investment. Why?
Hobson: Traditionally, real estate had been African-Americans’ be-all and end-all, the bricks and mortar that we understood and which could provide rental income. But attitudes changed as the real estate bubble burst in the 2007-09 period. That was followed by a rally in the stock market, which had bottomed in ’09. As stocks recovered strongly, people began viewing the market through a more favorable lens.
IBD: What are the preferred investment choices now?
Hobson: Typically, we start investing through 401(k) plans. Within those plans, popular choices tend to be funds for large-cap stocks, as well as fixed income and balanced funds.
And after they’ve gotten comfortable with retirement plan investing, some people have been opening up a brokerage account.
IBD: What are the smart and not-so-smart stock investing moves by African-Americans?
Hobson: On the plus side: I’m glad to see a willingness (60% of blacks and 78% of whites) to ride out the market’s swings and stay invested.
On the downside: 65% of African-Americans and 51% of whites believe that market-timing is important. This is just wrong — and it’s a notion investment firms and mutual funds companies have been fighting. Another bad idea: acting on stock tips. Before buying a stock, you need to do research and be knowledgeable about it — not just grab something heard about at the water cooler.
IBD: Do many African-Americans use a financial advisor?
Hobson: African-Americans are generally more novice investors than whites. Our prior research has shown that (as a group) we’re more likely to seek the counsel of financial advisors. Like all people, African-Americans want financial security and a better life for their children.
I don’t think market professionals have yet been noticing this market. But it is a very real opportunity for them — and over time, it’s one they’ll find valuable.
IBD: What’s the best way for African-Americans to gain knowledge about how to make money in the stock market?
Hobson: I’d recommend getting a knowledgeable financial advisor that can help educate clients and explain financial terminology in a clear, understandable way. I also tell people to immerse themselves in publications’ business pages so they can get used to the lingo and terminology, which will help educate them over time. Among publications, I particularly like Black Enterprise’s coverage of personal finance and investing. Among the books people should read is my favorite, “Buffett: The Making of an American Capitalist,” by Roger Lowenstein. Among internet resources, Morningstar.com does a great job, and I also particularly like HelloWallet.com.
IBD: How did you get into this industry?
Hobson: I didn’t grow up in a household that discussed the stock market. I was one of six kids raised in Chicago by a single mom, and we worked hard to make ends meet. As a child, I was desperate to learn about money and financial security.
I entered the investment world working as a college summer intern at Ariel Investments. Later, as I would give talks and speeches about investing, I discovered my community was a missing link when it came to public knowledge and awareness of savings and investments. So I decided to shine a light on this issue.
IBD: What does your personal investment portfolio contain?
Hobson: To accommodate an expected long life, I am 100% invested in stocks. My family has a money manager and we favor value investing. I am not an active stock-picker. I have holdings in all six of Ariel’s mutual funds. I also own shares in the individual companies — Estee Lauder (EL), Starbucks (SBUX) and DreamWorks (DWA) — in which I sit on the board and I have stock holdings in a few other companies, including Berkshire Hathaway (BRKB).
IBD: What’s the most important thing African-American parents can teach their children about money and investing?
Hobson: It’s important for a child to understand compound interest. That’s what Warren Buffett calls the Eighth Wonder of the World. This concept is so important because it explains how money can grow and shows how having high interest rate debt makes it so difficult to get ahead.
The way it can be explained to a child: Show through examples how money grows on top of itself. Take a penny, add interest onto it. That makes it, say, a penny-and-a-half. After that, interest gets added to the (new total) of a penny-and-a-half, creating a higher amount, and so forth.