Holding onto Stocks during the Recession Yielded Benefits
October 29, 2014
From 2009 to the present, stock values have almost tripled. Some investors reaped these benefits, while others -- many of whom had bought stocks when prices were rising in 1990s and the 2000s -- sold their stocks as the market tumbled, taking large losses.
Over at the Wall Street Journal, Josh Zumbrun reports that individuals' divergent responses when the stock market fell during the Great Recession is one reason behind growing wealth gaps, with many individuals and families simply selling their stocks at the wrong time:
- Looking at the bottom 90 percent of households, the share of households with stocks fell by 4.4 percentage points. According to the Survey of Consumer Finances by the Federal Reserve, that is as if 5.4 million households sold stocks.
- The top 20 percent of families are 5 percent less likely to own stocks today than they were in 2007.
- According to a study from University of Michigan economists, households with higher levels of education and the strongest stock portfolios tended to continue purchasing stocks during the market downturn, while other households were more likely to sell.
Those who remained in the market and held onto their stocks benefited greatly. Economist Frank Stafford gives the example of two investors who held $100,000 in stocks in 2007:
- If one of those families lost half of their stock portfolio value during the downturn and sold in 2009, they might have just $50,000 in a savings account today.
- If the other family, which also lost half of its stock value, held onto its stocks, it could have $130,000 in stock today.
By taking their dollars out of the stock market, many families are now unable to benefit from the stock market. According to Jeremy Siegel, a University of Pennsylvania economist, stocks have returned 6.7 percent annually, on average, over the last 200 years -- better than bonds, gold and the U.S. dollar.
Source: Josh Zumbrun, "Bad Stock-Market Timing Fueled Wealth Disparity," Wall Street Journal, October 27, 2014.
Browse more articles on Economic Issues