A Top-Down Look at the Black-White Wealth Gap

I’ve missed writing over the last few weeks. I’m busy recruiting for jobs, as I will be graduating from my MBA program in late May. During most of the month of February, I spent much of my free time reading about the wealth gap between not only middle- and low-income White and Black Americans, but also affluent White and Black Americans. The net worth, asset allocations, and perspective on investing is astoundingly different; in this post, I will explain these terms and why they matter. Similar to my readings for other blog posts, there is little work around women/women of color (WOC) on this issue, but given that American women still don’t receive equal pay, I think that this issue is important; based on the data in “Wealth Patterns Among the Top 5% of African-Americans” by Credit Suisse Research and Institute on Assets and Social Policy at the Heller School for Social Policy and Management at Brandeis University, roughly 20% of wealthy blacks are female “headed” (whatever this means).

Net Worth: what you own (assets) minus what you owe (debts). In short, it’s your wealth.

Assets. You want to own things that grow in value (home, land, other property, real estate, businesses, college degrees, stocks/bonds) and you want to minimize purchasing things that drop in value [cars, clothing, technology (owning a $10,000 4k UHD television isn’t likely going to grow in value)]. Fad items, like iPhones or sneakers, are typically terrible investments. It is more financially beneficial to invest in the stocks of the companies with fad and/or cool products (like Apple or Nike) than the “hot” products that they sell. Just to give you an idea, here’s the calculation of my first two Apple purchases (my mom actually bought the iPod for my 16th birthday) and how much money I would have made had I invested in Apple’s stock instead. Summary: I would have about $75,000 in the bank instead of $2,000 in somewhat useless products (as I’ve moved away from the bulky 5GB mp3 player and the 20lb laptop).

Screen Shot 2015-03-12 at 1.10.33 AM

Debts. You’ve all heard this word before so I’ll spare you. All the credit cards for cool clothes or the latest gold MacBook Pro are all purchases that bring short-term happiness and potential long-term bondage; emergency expenses are a different story. Check out “The Power Struggle of Saving: Choosing Modesty Over Flashy” if you haven’t.

Asset Allocation: your entire portfolio of investments that balance risk (loss) and return (reward). Risk and return work in tandem. The general rule of thumb is low risk = low return and calculated,well-informed, high risk = high return; effective risk management is executed with strong expertise in the field/industry and/or the assistance of a trustworthy investment professional.

Investments. I think that some people often view “investment” as a dirty word; simply put, an investment is an act of devoting time, effort, or energy to a particular undertaking with the expectation of a worthwhile result (Source). The expectation part is purely speculative, based on the market (other people’s views of your investment). For example, you might want to earn $50,000 out of high school, but going to college might be a better investment than working full-time only directly after high school; in other words, some investments are better (getting you to your goals quicker) than others; college is a great example of maximizing earnings power over a lifetime. Read “Death: The Ultimate Economic Transaction” if you haven’t on time and why time really is money.

Managing Risks. Potential losses can be mitigated by diversification. Modern portfolio theory proves that diversified portfolios will always outperform concentrated portfolios. Concentrated portfolios can derail wealth building and/or financial stability as a whole. Below is an average portfolio for five groups: 1) All Americans, 2) Black Americans, 3) White Americans, 4) Top 5% of Black Americans, and 5) White American equivalent to Top 5% Black Americans. The comparison of the top 5% of Black Americans is roughly the top 28% of White Americans. The report makes an attempt to make “an apples-to-apples” comparison by using similar dollar amounts (@ $357,000) for net worths instead of percentiles; while one would expect portfolios to be similar for based on wealth, as you can see below that is not the case. (Source: “Wealth Patterns”).

Source: "Wealthy Patterns"

Source: “Wealthy Patterns”

Perspectives

The overarching point from the data is: Black people have lower risk, less diversified asset allocations (or portfolios) than their peers. CDs and life insurance are super conservative (risk averse) investments.

  1. Black people don’t buy bonds at all; this could be indicative of the lack of trust/faith in big corporations or Wall Street in general.
  2. Wealthy blacks prefer CDs (no real risk, avg returns of <1.5%) over mutual funds (avg returns of those mirroring S&P is 10-12%); that is, by not investing in mutual funds, wealthy black portfolios lose ~9.5% (or don’t gain ~9.5%, which I take as a loss when benchmarked against peer portfolios) on average each year.
  3. All black people, on average, take out 2x more life insurance than all white people; I think life insurance is completely unnecessary for most of the upper class (and some of the middle class). If you save, then you don’t need to “insure” your family. With insurance, one pays a company every month with the hopes that if something happens to you that the company will actually honor the contract and your death is actually covered under the contract.
  4. Affluent black people invest roughly 4x less in businesses than their white counterparts.
  5. The one anomaly is that Black people feel comfortable investing in real estate, which could be lucrative when investments are well executed.

Takeaways

Here are reasons why the wealth gap, particularly between the most affluent, matters:

  1. Fear and Faith. Fear of loss (money) and lack of faith in trustworthy (arguably, because there are few, credible black financial advisors in this country) investment advisors play a major role in wealthy blacks’ asset allocations.
  2. Optimize profits. Everyone should make the money that they earn work as best as it can for themselves. Not doing so minimizes your options in the long-term.
  3. Financial Literacy. The top 5% of blacks do not exhibit financial understanding (that is, financial know-how and comfort across a variety of investment options) when compared to their peers (and sometimes middle class whites). I also don’t expect the black working or middle classes to be financially literate if the black top 5% show complete financial competence/comfort).

The trickle down effect of fearful, inefficient profit-seeking, concentrated asset allocation driven, low financial literate (when benchmarked against counterparts) wealthy Black Americans: Lack of optimal investing in profitable businesses and resources that scale community impact. Wealthy blacks invest in businesses, which often times employ other blacks, increasing the quality of life for the black low/middle classes and improving black communities as a whole. If they aren’t performing in-line with peers, then there’s a lot of missed opportunities/options for improving the quality of life for the entire black collective.

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