The stock market participation puzzle has been investigated and reported on in many economic classes, journals and newspapers. According to modern portfolio theory and all of the empirical evidence, everyone should invest at least a fraction of their wealth in stocks in order to take advantage of the equity risk premium. The equity risk premium is the dark line in the charts. It is the return on stocks minus the return on bonds (interest). The puzzle is, why knowing that stocks significantly, consistently outperform government bonds, do the vast majority of people hold no stocks. The empirical evidence shows that
- The stock return is constantly higher than the risk-free rate over the long term.
- Wealthy households own almost all stock.
- The share of wealth held by wealthy households is positively correlated with stock prices.
So why do most people avoid investing in the stock market? Here is a summary of the research. Most people don’t invest due to …
the monetary costs of investing
- Transaction fees
- Brokerage fees
- Financial advisor fees
and/or the nonmonetary costs of investing
- Financial literacy (lack of knowledge in finance)
- Trust (lack of trust in company integrity and/or growth)
- Uncertainty in the labor market (risk of unemployment)
- Lack of family and peers with stock investments
Our mission is to rip down these barriers. Join us.