Why Is America’s Stock Exposure at Historic Highs?

Experts suggest more than 50 percent of U.S. households have some investments in stock. In 2020, an estimated 41 percent of the nation’s workers had access to a retirement savings plan through their employer or a union.

However, access to an asset class doesn’t necessarily guarantee people will invest in it. What is it about the current stock market that makes it so appealing to Americans?

Historical Growth – With Real Risk

Stocks are certainly not devoid of risk. The start of the pandemic last year was terrifying for many retirees and soon-to-be retirees. In early 2020, markets fell sharply in a matter of weeks.

Those disconcerting plunges were brought on specifically by a severe pandemic that caused the global economy to grind to a screeching halt in a matter of weeks.

What’s more telling, and likely one of the main reasons so many Americans feel comfortable investing in the stock market right now, is what happened after the plunge; investors who stayed invested through that period saw their holdings recover, but there was no way to know that in advance.

They later recovered, but there was no way to know at the time how long that recovery would take. Past recoveries are no guarantee of future ones. By all accounts the pandemic cratered industries across the world, but it turned out the fundamentals were left relatively intact.

Market Growth Far Exceeds Savings or Bond Growth

U.S. stocks have historically grown over long periods, though that growth has come with sharp declines along the way, and past market behavior doesn’t tell you what markets will do next.

Most American workers using 401(k)s or IRAs are likely investing in a curated selection of managed ETFs and mutual funds, which usually experience relatively healthy growth if the market is doing well. Plus, stock valuations tend to naturally adjust with inflation in ways a fixed savings account, CD or traditional bond won’t (not counting inflation-protected or inflation-linked bonds).

American workers who aren’t planning to retire soon often see little downside in aggressive investment strategies.

The market didn’t reach its pre-2007/2008 crash valuations until mid-2013, but it did recover. By 2017, there was strong, consistent growth that strengthened faith in stocks. A buy-and-hold approach gives investments time to recover from losses, though recovery is never assured and can take years.

Most Americans Take a Set-It-and-Forget-It Approach to Investing

The average American isn’t checking their 401(k) or IRA multiple times a day. Many workers might go a year or more without even logging into their employee-sponsored retirement plan’s dashboard. When you have professionals managing funds that will grow for 20, 30 or 40 years, there’s little need to micromanage. Modern retirement savings options have made it attractively easy to invest in the market.

Whether a worker even notices the sliver of each check that gets deposited into their retirement savings account depends on their own financial situation. In many cases the bimonthly deposits are incrementally small enough that workers don’t feel a difference.

When saving for retirement is, for all intents and purposes, a pain-free and effort-free endeavor, many Americans are happy to partake.

Matching Funds

Another significant factor that likely motivates many workers to contribute to retirement savings accounts are matching funds. An employee can essentially give themselves a five percent raise if their employer will match up to five percent. Failing to maximize matching contributions is essentially leaving money on the table, and many workers who have the financial flexibility to take advantage do so.

Are There Downsides to the Stock Market?

Yes, there are downsides to every potential investment. The drop in the market following the outbreak of COVID-19 is an obvious reminder that stock growth is never guaranteed. How Americans feel about risk is largely dependent on where they are in life. The risk inherent in the stock market is less worrisome if you aren’t forced to rely on those funds today.

Stock market performance can’t be tracked with a single metric. Growth and loss of equity value isn’t uniform across the board. This is a feature, not a bug. The diversity of equity investment opportunities allows good money managers and investment professionals to help their clients manage risk when the market takes a turn.

At Fullerton Financial Planners, we’re committed to using our extensive knowledge and experience in the stock market to help grow the wealth of retirees and soon-to-be retirees. We can help you develop a plan that pursues growth while managing the risks that unforeseen market forces pose to your nest egg.

Call us to discuss your retirement savings options.