Blame Congress, Not Facebook IPO, For Americans Souring On Stocks? ~ MAKE MONEY BLOG$

MAKE MONEY LOG$~After Facebook’s messy initial public offering last month, the pundits (among them, billionaireMarc Cuban in his bloghere) predicted it would turn individual investors off of the stock market.
Sorry, but that’s a lot like saying that a looming Washington D.C. standoff over taxes and the deficit will lower Americans’ opinion of Congress, which has a current Gallup poll approval rating of just 13%.

The new triennial Federal Reserve Survey of Consumer Financesreleased earlier this month reports that only 15% of families were invested in stocks directly in 2010, down from 21% in 2001. And just 10% of families headed by someone younger than 35 owned stock directly in 2010, half the 20% who owned shares in 2001. Moreover, despite the spread of 401(k)s and the growing use of target date mutual funds (which include stocks) as the “default” option for workers’ retirement money, the percentage of families owning stock even indirectly fell from 53.2% in 2007 to 49.9% in 2010, the lowest level since the 1990s. Among families younger than 35, just 39.8% owned equities even indirectly in 2010, down from 49.1% in 2001, even though 42.1% of all young families owned retirement accounts in 2010.Turns out, it might not be more than a coincidence that Americans’ trust in institutions (not just Congress, but banks, big business and, yes, the media) has generally been falling along with their direct stock ownership. “When we look across countries, there’s definitely a connection between trust in society and the willingness people have to invest in the stock market,’’ says Paola Sapienza, the Merrill Lynch Capital Markets Research Professor of Finance at the Kellogg School of Management at Northwestern University. To trade in stocks, she points out, you need to trust in other people (company executives and perhaps a broker) and also trust that regulators will protect you from being cheated.

The most persuasive evidence that trust plays a role, Sapienza says, is the difference from country to country in direct stock ownership by the wealthy, who presumably should all own shares. A December 2008 paper she co-authored, Trusting The Stock Market, compared the rate of direct stock ownership among the richest 5% of residents in 12 developed countries. In Sweden, where trust was highest, 80% of the wealthiest owned stocks. In the U.S., where trust was a bit above average, 70% did. But in Greece and Spain, where trust was low, just 24% and 14%, respectively, of the wealthy owned shares directly.

Sapienza and Luigi Zingales, the Robert R. McCormack Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, have been surveying Americans since December 2008 for something they call the“Financial Trust Index”. The results aren’t pretty. As of March, just 15% trusted the stock market, 14% trusted large corporations and 28% trusted mutual funds.

Obviously, trust sinks during a crisis. Still, levels of trust tend to be established fairly early in life, Sapienza says. “If you look at immigrants, if they came to the U.S. after high school, they behave in terms of trust in institutions, much closer to the people back home,’’ she observes.

That got me wondering how the 2008 financial crisis and current comparatively low levels of trust in the U.S. might affect those coming of investing age recently—the so-called millennials. My interest in the issue was peaked when I heard two 20-somethings say—after the Facebook IPO mess–that they wanted to invest in individual stocks.

Forbes contributor Chereen Zaki told me she’d recently opened an E*Trade account with her new husband. “The Facebook fiasco is what caught my attention. I think it was because Facebook was something I actually understood and could follow closely,’’ she explained in an email. Zaki, who earned a Georgetown University MA in Communication, Culture, and Technology in 2011, put it this way: “I figured that as a social media geek and someone who constantly trolls the news and stays up to date, I could use that to my advantage for other stocks. In a weird sense, I disassociated stocks from the greedy Wall Street suits and linked it to things I understand.’’ Zaki’s husband, who studied film in London, is “using his film knowledge to predict which blockbusters will affect studio stocks, and I’m doing the same with social media,’’ she continued. “So naturally we started small and invested in Time Warner, Walt Disney Co., and Zynga (at $5).’’

Similarly, my own 23-year-old son, who studied the environment and economics in college, wants to start investing in a few green tech companies. His reasoning; He can’t earn anything on savings in the bank, he wants to be only in socially responsible companies and the market as a whole has been a downer as long as he’s been watching it. (When he graduated from high school in 2007, the S&P 500 was above 1500; on Friday, it closed at 1335.)

Yet such comments fly in the face of both the Fed numbers, and what I hear from Nancy Anderson, a Certified Financial Planner and head of the “Think Tank” at Financial Finesse, a firm that has been hired by hundreds of employers to answer financial questions from workers. The under 30s who call for advice, she reports, are “asking questions on investing in the real estate market–buying a home because it is affordable and a good deal right now,’’ and some are investing in target date mutual funds. But they aren’t showing much interest in individual stocks and have less confidence in their investments (according to Financial Finesse’s surveys) than any other age group. “This age group not only saw their first 401(k) statements with a loss but they also observed what happened to their parents such as delaying retirement,”’ she notes, an experience that “may have added to their skepticism and mistrust that stock (and mutual funds) are the way to go.”

How to make sense of it all? Here’s my theory, for what it’s worth. Despite an overall erosion in trust, Americans still trust in business more than they do government, and more than many Europeans do. For example, in the 2012 Edelman Trust Barometer, which measured attitudes in 25 countries, 45% of U.S. residents still say they trust business, down from 58% before the 2008 financial crisis, while 36% trust government, down from 39%. By contrast, in the U.K., France & Germany, trust in business and government both average around 30%.

But what Americans (and particularly young Americans) really trust in is entrepreneurialism and technology, not big business or Wall Street. In the Edelman survey, for example, 81% of Americans said they trust in technology, but only 27% believe CEOs are credible. In Gallup’s most recent U.S. confidence survey, 63% of respondents expressed a “great deal” or “quite a lot” of confidence in small business, compared to 37% in the Presidency, 21% in organized labor and big business, and that bottom-of-the-barrel 13% in Congress.

Yes, the milliennials have a heavy student loan debt to pay off and are keen to buy homes and invest in their own entrepreneurial ideas. (A 2011 Kaufman Foundation survey found 54% of them want to or have started their own businesses.) But to the extent they have any money left to invest, I’m guessing a good number (not a majority, but more than the 10% of 2010) will decide to bet on their own knowledge and ability to pick stocks, rather than rely on a rising economy and stock market to life all index funds or trust the advice of a broker working on commission. That’s not so crazy in a world where the Internet equalizes individual investors’ access to information —okay, maybe not insider tips from a Goldman Sachs board member, but a lot of other crucial metrics. Forbes Investment Strategies columnist William Baldwin points to two other reasons for a return to individual stocks. First, he says, buying and selling individual stocks is now cheap, compared to the days of full service brokers when, ironically, individual stock ownership was higher. (The individual-stock approach now makes sense even in foreign markets, which used to be forbiddingly expensive to get in and out of, he says.)

Secondly, as Baldwin explains here, there are significant tax advantages to be captured (in regular, non-retirement accounts) to owning individual shares. Those advantages will become even more compelling if the Bush era tax cuts expire as scheduled at the end of this year and tax rates rise.

No, Baldwin doesn’t advocate investors bet their whole nest eggs on stock picking, let alone Facebook shares. But instead of buying expensive actively managed mutual funds, he suggests, investors should own a combination of cheap index mutual funds (or ETFs) and individual stocks.

That sounds like good advice for baby boomers and Gen X, as well as for the millennials.

Source: Forbes.com

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