Minority investors may have advantage

Value Judgments

Your Money

October 31, 2004|By JANET KIDD STEWART

WHEN IT comes to investing, who we are may matter more than what we know.

Cultural and religious background plays a bigger role than education in determining investors' attitudes about money, according to an article in a forthcoming collection of scholarly works by Oxford University Press titled The Sociology of Financial Markets.

The weighty tome takes on such issues as the role social networks play on trading behavior in financial markets and the decision-making process of the Federal Reserve.

And in a chapter devoted to the role cultural bias plays in investor decision-making, Werner DeBondt reviews a study of Western European investors that found stark differences among nationalities and religions.

French investors, for example, were more likely than others to say that money buys happiness. British investors, to a greater degree than Europeans as a whole, said the risk-return trade-off is better with savings accounts than with real estate.

"Culture matters," said DeBondt, a behavioral finance professor at DePaul University in Chicago. "Certain groups are clearly underrepresented in equities."

Studies of U.S. investors have found similar cultural bias. Even after controlling for income, black and Hispanic investors are substantially underrepresented in the stock market compared with their white counterparts, for example.

Just 13 percent of Hispanics earning at least $75,000 a year owned common stocks in 2003, compared with 18 percent for the general U.S. population, according to a coming study by Mediamark Research for Hispanic Business Inc., a market research firm. Fourteen percent of affluent Hispanics owned mutual funds, while 21 percent of the wider U.S. population owned them last year. Hispanic investors in the study were found to concentrate more of their wealth in homes and businesses.

A separate annual investor study by Charles Schwab and Ariel Capital Management found that 61 percent of black investors owned stocks in 2003, compared with 79 percent of white investors. More than half of black investors reported being bearish about the market, compared with 40 percent of white investors.

Taking familiarity and cultural bias out of investing will protect investors from trading too much or falling victim to unscrupulous brokers trying to take advantage of these biases, said Mark Seasholes, assistant finance professor at the University of California-Berkeley.

But I wonder if there might be some merit to hanging on to some of the old ways.

Hispanics are less likely to own credit cards and more likely to invest higher portions of their wealth in their own companies and homes. Think about the economy, rising consumer debt levels and the stock market over the past five years, and it becomes much harder to make the case for transitioning more people into the equity markets.

It's important to note that these patterns are changing, as more Hispanics climb the corporate ladder and amass sizable 401(k) plans, said Juan Solana, chief economist for Hispanic Business.

But even as more Hispanics gain access to higher incomes and investment strategies, a significant portion still may gravitate to lower-risk investment products because of their ingrained cultural values, he said.

Simply chasing the highest investment return can be costly in terms of the stress it produces if it injects a level of volatility that doesn't suit you, said Steven Leder, a Los Angeles rabbi and author of More Money Than God: Living a Rich Life Without Losing Your Soul.

E-mail Janet Kidd Stewart at yourmoney@tribune.com.

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