What is the average American Worth?

July 17, 2011 1 comment

This blog is a little side note on the average wealth of Americans before we continue to delve into who owns stocks in the US some more.  The average worth of an American family in 2007 was $557,800 according to the Survey of Consumer Finance (SCF).  So, what is the average American family’s net worth in 2011?  Let’s assume that the US Gross Domestic Product (GDP) is a good indicator of the worth of the country and therefore can be used as a guide to adjust the average American Family’s worth.  The US GDP at the end of 2007 was 14.3 Trillion and at the end of the 1st quarter in 2011 was $15.  Therefore a good multiplier for wealth would be 15/14.3 = 1.0489.  This means that the average family net worth today would be about $585,000.

Before looking at the statistics, we have to talk about what type of statistics we are going to look at and what they are used for.  The mean or average is calculated by taking the total wealth of all families and dividing it by the number of families.  Another useful statistical figure is the concept of median.  The median family wealth measure would mean that half the families have more than this amount and half the families have less than this amount of wealth.  While, mean value of family wealth is $585,000, the median value is quite different at $126,000.  How do we interpret this?  It means that most families have significantly less than the $585,000 and a greater proportion of the wealth is held by the wealthiest individuals.  The following table for Median and Mean Income and Wealth I derived from the underlying data in the Survey.  Income is what you make in a year and Wealth is what you are worth in terms of all the assets you have (home, savings, cars, investments, etc).

There are a lot of interesting conclusions that you can come to by looking at the above table.

  • Income for the bottom 90% of the people tends to be fairly evenly spread inside their wealth bands (median is close to the mean).  This means that salary is spread evenly within the band and not skewed towards the high or low ends.
  • Income in the top band is not evenly distributed as the mean is almost twice as much as the median.  This means that a few individuals in this band make considerably more than others in the band.
  • Wealth is not directly related to income.  The more income you make the more wealth you can have as a percent of our income.  For example, the Lowest 20% of income have a Median Wealth of 8,500 for a Mean Wealth to Income Ratio of .65.  The wealthiest 10% by comparison have a Mean Wealth to Income Ratio of 5.4.  This makes sense, as the more money you earn, the more things you can accumulate.  Rather than spend all your money on things you immediately consume like food, gas, electricity, etc, you can spend it on assets that have an on-going value like houses.  Also, you have more income you don’t need to user right away that you can obviously invest in stocks, bonds ,etc.
  • The total wealth of the nation is concentrated at the very top.  The top 10% owns nearly 60% of the wealth.

Now how does this knowledge of unequal wealth distribution apply to who owns stocks. That will be the next blog subject.

Categories: Wealth

Who really owns Stock in the United States – Part 3?

July 17, 2011 Leave a comment

Now to investigate how many families really own stock and how it is distributed based on demographics like age of head of household, richest to poorest, etc.  There is not as much raw information on this as there were some of the other things I have been looking into.  But, again the Federal Reserve Board does have some statistics.  The main statistics that breaks down ownership of assets that I could find is the Survey of Consumer Finances (SCF) which is done every three years or so.  The latest full survey I could find was in 2007.  There was one done in 2010 which would be of much more relevance, but, it is not scheduled to be published until early 2012.  So, I will need to be satisfied with the pre-recession data and only get to speculate on what the effect of the recession has been.

According to the SCF in 2007, over 50% of US families owned stock.  The majority of this was owned via mutual funds or IRAs instead of owning individual stocks (Only 17% of families own individual shares of stock).  This 50% of families with either direct or indirect stock ownership is way up from the 30% in 1989.  My guess is this is due to a number of factors with the leading factor being the growth of Individual Retirement Accounts.  In fact, the IRA chart looks roughly the same as the stock holdings chart.  Also another factor is that the internet and discount brokers democratized stock market trading by making it both easier and cheaper for an investor.

Another interesting fact about these ownership charts is the downturn in 2001.  This coincides with the stock market downturn due to the dot com bubble crash in that time frame.  People got out of the market during this period.  With this in mind, I am sure people must have left the market after the recent recession and in some cases gotten back in as it has recovered over the last two years.  So, to hazard a guess, based on these factors, I would say that about 50% of Families actual own stock either directly or indirectly.

In the previous blogs, I had determined that the average family owned $160,000 worth of stock in the United States.  According the Survey of Consumer Finances, the average stock portfolio of households holding stock in 2007 was around $151,831.  Again, close enough to our working number.

So, if you are a stock owner do you own $160,000 worth of stock?  Again, I think what you own in stock is tied to what your income is, how old you are, etc.  That of course turns out to be true.  The SCF chart below shows the percent of income as bands.  For the families with incomes in the lowest 20% band only 15% of these families own stock.  For the families in the top 10% of income (90% – 100% band) over 90% of these families own stock.

So if you have more income, you are more likely to have extra money and therefore more likely to invest in the stock market.  Another perspective is looking at it by how old you are.  The next chart shows how many families own stock by the Age of the Head of Household which also correlates somewhat with income as you gain experience in the job market you usually make more money.

There are some minor surprises with this graph.  While the trend has been upwards over the last 20 years for families of all ages, they certainly don’t trend the same way.  As you would expect the two top groups are the ones with the most money and currently seriously saving for retirement.  For the Families with Head of Household between 45 and 64, about 60% of them own stocks.  The next group at over 50% is the 35 to 44 age group, which again makes some sense, as they are starting to earn more money and are having at least some vision of retirement.

The real surprise comes in the next groups.  People under 35 were saving much along the same trend line as everyone else until the dot com bust of 2001-2002 and then they got out and didn’t come back.  You can also see that the 35 – 44 year old group didn’t come back.  With all the press about saving for retirement and how Social Security is going broke, I feel that these age groups know they should be saving for retirement.  But, it appears that they aren’t at least in the stock market.   This is puzzling and a little concerning.  We can only assume this means that they didn’t have the money to get back in.  The question is will they get back in the stock market in the next few years and if they don’t how are they going to afford retirement.

Also, somewhat bewildering is the 65 – 75 age group and those over 75.  Both groups are buying stock.  In fact, they appear to be the fastest growing group in terms of families investing in the market.  It would be interesting to understand what percent of their investment is in stocks versus other things like bonds, CDs, etc.  Conventional wisdom is that you should be putting less in the stock market when you get older and while these statistics don’t identify how much they are putting in the stock market a larger proportion of the families appear to be investing at least some of their retirement money that they have to live on in the market.  This distribution in terms of actual dollars invested will be looked at in part 4 of this blog series on stock ownership.

In summary:

  • Since only half the families in the US own stock, our mythical Family investor has a portfolio worth $160,000 based on calculations done in my other blogs and validated in SCF Survey
  • Families that are getting close to retirement and are in their later middle age have more money and tend to be more into the market than other groups
  • Young people are not getting into the market as much as they were
  • Retired people are getting into the market faster than anyone else
Categories: Stocks

Who really owns Stock in the United States – Part 2?

July 17, 2011 Leave a comment

Well, obviously ultimately people own stock.  Looking at data from the census for this last decade, you can get a feel for just how people and institutions own this stock at least in the United States.  According, to the census there was over 20 trillion dollars associated with US Companies that had equity ownership (i.e. publicly owned) in 2010.  In 2008 , there was under 16 trillion dollars invested in the Market (i.e. Market Cap).  Does this mean that companies went public that were valued at 4 trillion dollars in 2009 & 2010.  I don’t think so.  So, what does this value really represent?

My understanding of the stock market is fairly simple.  The value of a company is determined by what people are willing to pay for stock on the chance that it will provide a return for them.  In the simplest form you buy a stock because you are expecting them to pay you out a portion of their earnings in the form of dividends.  Also in terms of valuation, you can also probably add to some extent that a firm does have some assets, as well, that also have value and in theory could be liquidated for income too.  So, you could make the case that a stock is worth the dividends it pays along with its’ residual liquidation value.

But, unfortunately it isn’t that simple.  There are many so called “growth” companies that don’t pay dividends.  I will address how many companies pay dividends (about 75%) and why others don’t and what the value of a stock should really be in another blog.  Suffice to say that a stock’s worth is what people will pay for a stock times the number of stocks outstanding (future Market Capitalization).  It really has nothing to do with what you paid for it or only what its’ dividends or liquidation value is.  It is what people are willing to pay you for it.  Again, that will be great subject for another blog as well.  So, this means for all US companies that people were willing to pay 16 trillion dollars in 2008 and in 2010 they were willing to pay 20 trillion dollars.  But, back to the subject of this blog, who in the heck owns all this stuff?

The following is a breakdown, of the ownership of stock in the first quarter of 2011:

So, about half (49.9%) is owned by individual investors (US and Foreign) actually making choices on individual stocks on what to buy or sell.  About a quarter is owned by mutual funds, exchange traded funds and Closed End Funds (24.8%).  In essence these are directly owned by individual investors who are more passive in nature and letting these types of companies buy stock for them.  They want to be involved in the market, but, don’t want to make decisions beyond rather broad decisions (i.e. a type of fund to invest in).  Pensions are the next big hitter with 17.0% of the stock market.  Of course, these belong to individuals too, but, you either have one or not and an individual in that past has made no decision as to what to invest in or not with their pension fund.  The pension funds have to think more long term and would be somewhat risk adverse in the market I would think.  They don’t need to look for big wins and need to be more oriented to overall, steady returns.  The rest (under 9%) is banks, brokers, insurance companies and other institutions trying to generate income from the market.

Knowing this breakdown now, will help me get a better feel for what kind of market moves are being made and what might be the motivation.  I was kind of surprised to see that half the market was people investing in individual stocks.  I had thought that most of the market was probably mutual funds (passive investors) and institutional investors.  The mutual funds and now exchange traded funds are still big players.  Of special interest here, is the impact of Exchange Traded Funds as they are completely passive investment vehicles.  I will blog later on ETFs and try to judge their impact.

I was also really surprised by the footprint of pension funds and insurance companies.  The percentage owned by pension funds is of special interest as we know that most people no longer have pensions and therefore these pension funds will be more and more focused on generating income to pay out the pensions instead of bringing in new money and investing it.  What will the impact of this be in the future of the stock market?  This will be another great topic for a future investigation.

Categories: Stocks

How much Stock is owned by Americans – Part 1?

July 17, 2011 Leave a comment

It was nice to know that the average person in the world had owned about $8,600 worth of stock.  We all know that there is no average person in the world.  The world’s wealth is spread very unevenly across the globe.  The average income in the wealthiest country (Luxemberg) is $37,500 versus the poorest country (Ethiopia) is $91.  The average for the whole world is $5,700.   The US is fifth on the list of countries with an average per capita income of a little over $33,000 a year.  Again, another surprise as I always assumed we had the highest per capita income.  So a quick rule of thumb could be that an average American owns (33,000 US average income/ 5700 World average income) X $8,600 World Average Stock Ownership = $49,800 of stock owned per US person by assuming that since our income is higher our stock ownership should be too.   Let’s say $50,000 per person in the US.

Let’s look for other measures.  One approach, though again rather crude, is to assume that only Americans own the stock in the NASDAQ and New York Stock Exchange (NYSE).  We know this isn’t true because obviously Foreign Investors own stock on these exchanges.  But, also keep in mind that Americans own stock in Foreign Markets, as well, so let’s say that Americans own as much stock in Foreign Markets as Foreign Investors own stock in our Domestic Markets (NASDAQ/NYSE).  The Market Cap for the NYSE & NASDAQ is about $17.7 trillion dollars.  There are 346 million US citizens.  Therefore, the average ownership would be 17.7 Trillion / 346 Million = $51,156 per person.  That is pretty close to the $50,000 we calculated previously.

With two rough rules of thumb in hand can we dig deeper into it?  While it would be nice to think that only Americans owned all the shares of the NYSE and NADAQ it obviously isn’t the case.  Also, Americans own shares in other stock exchanges around the world (i.e. the other 65%+ in the pie chart).  So, I went to the census statistics to see if I could find how much stock Americans owned.  I found this buried in their statistical database in table L.213.  This table showed what the American Ownership in Capital Equities (stocks) is.  This data helped sort out what the foreign investment in US stock markets was and what we owned in foreign markets.  It showed that US citizens owned $4.6 Trillion dollars of Foreign Equities and Foreign Investors owned $3.3 Trillion dollars in the US Domestic Markets (NYSE/NASDAQ).  So, this means that around 20% of the US Markets are owned by Foreign Investors, but, we own more of their stock than they own of ours.  So, it kind of put’s a different perspective on the alarmists you hear shouting about all these Foreign Investors buying America.  In any case now we could take the $17.7 Market Cap value and add the $1.3 Trillion difference (4.6 – 3.3) to get $19 Trillion and divide this by the 346 Million people to get $54,913 per person.

Now we have about $55,000 per US person.  But, in reality this is a little bit high because other entities own stock too in the US and this should be taken out of the equation too.  Companies like Insurance Companies, Commercial Banks, Savings Institutions, etc, invest to make money.  While these are often publicly traded companies and therefore owned by US people, we still should probably take out their value as they aren’t investing to make their shareholders money, but, instead to make money and spread risk.  The total of all these type of companies according to the detailed census data was about $1.4 Trillion dollars.  So, if we take this out of the mix, we are back to $17.6 Trillion dollars.  So, the $50,000 a year per person seems like a good number that has been somewhat validated by three independent ways of getting to a number.  Now that I have a good number in $50,000 per person, I will try to calculate this based on the average US family.  Usually only person in the family is actually trading stock for the family.

The average family size in the US is 3.19 people. There are 346 million people in the US.  That means there are 95.6 Million Families (346 / 3.19).  The average US Family would then have 50,000 X 3.19 = $159,500 worth of stock.  Let’s call it $160K per family.

The Median Family Income in the US is $65,000.  This means that the average family in the US should have 2 ½ times their salary invested in the stock market.  So, do most families have the families in the US have more than $160K in the stock market and have do not have at least $160K invested?  I doubt it.  We all know that money and wealth is not distributed evenly.  Even so, this does give me a little better feel for how much ownership of public companies there is in general in the US.  

The Average US Family has about $160K invested in the stock market.  In terms of who really owns this stock will be an investigation subject for my next blog.

Categories: Stocks

How big is the stock market?

July 13, 2011 Leave a comment

The first question, I have is how big is the stock market?  That would seem an easy enough answer to find.  So, I went to World Federation of Exchanges (WFE) to download their copious statistics about the stock and bond market.  Just to be fair, you can only find out so much on the internet and doing the type of light investigation that I will be doing.  So, please keep in mind that I am just looking to get a better feel for things and not trying to get a true, accurate scientific answer.  I just want a broad heuristic to ground myself.

A measure of how big the market would be market capitalization.  This is simply multiplying the shares outstanding by the value of each share. The WFE listed 52 Stock Exchanges from the biggest (NYSE) to the smallest (Bermuda).  The total world market capitalization as of May 2011 is about 60 trillion dollars.  So, what does this mean?  From my perspective, this means that if you take all the public companies in  the world, that are traded on Stock Exchanges, people are willing to pay 60 trillion dollars to own all these companies.  Of this about $17.7 Trillion is in the New York Stock Exchange (NYSE) and NASDAQ and $2.1 Trillion in the Canadian Toronto Stock Exchange (TSX).  Figure 1, shows how the exchanges break down by area of the world.

As you can see, the US & Canada exchanges make up over 35% and US/Canada, Europe & Asia make up over 90% of Market Capitalization.  I was a little surprised for some reason I had thought that the US domestic markets would have been a much greater share of the overall world markets.  While we are the biggest, both Asia and Europe are roughly the same size.  It seems like we should pay more attention to these foreign markets.  I just had no idea they were so big.  I had always looked at international news and thought things like, “The European markets are going to be “shocked” by the Greek debt crisis, so, what’s the big deal because I figured the European market was 10% of the US markets”.  So, much for ignoring anything outside of the US now that I see where we really fit in the world markets at about 1/3 of the total.

I have a hard time getting my mind around the concept of 60 trillion dollars.  Sure seems like a lot of money to me.  But, I also hear outrageous sums of money associated with Market Derivatives, National Debt, etc.  So, again in order to get some perspective let’s see how this Market Capitalization might break down into more meaningful numbers.

Average ownership per person in the world = 60 Trillion Cap / 6.93 Billion people = $8,658 per person

Compared to the National Debt = 60 Trillion / 14.4 Trillion = 4 times the National Debt

Compared to the US Gross Domestic Product (GDP) = 60 Trillion / 15 Trillion GDP = 4 times the US GDP

While these are very gross numbers it shows that all the companies in the world are worth $8,600 to every person.  This $8,000 is just about the average annual income of all the people in the world.  It also shows that the worth of all the companies is 4 times more than the total output of the United States in one year.  Since the US GDP is about 25% of the world’s GDP this means that the total value of all the companies in the world is equal to the total output of everyone on earth for an entire year.  In other words, if you wanted to buy all the stocks in the world you would have to use everyone’s income in the world for an entire year.  That my friend, is a lot of money.

Categories: Stocks

Confessions of An Ignorant Investor

July 10, 2011 Leave a comment

I have been investing in markets, making money and losing money, for some time now.  I listen eagerly for the latest news about what is happening, spending at least an hour each day perusing Yahoo Finance, WSJ, The Motley Fool, Seeking Alpha, etc.  I have tried being a fundamental investor and I have tried detailed technical analysis.  I have devised many trading strategies using my knowledge of Amibroker and its’ dazzling array of technical indicators.  I carefully follow strategies that according to my technical analysis have looked promising, only to have marginal success.  I have thought many times that I had figured some of this out, only to end up being a sap that can’t time the market.  I read advice column after advice column of what to do in the stock market, all written by people who are trying to make money off my ignorance.  In summary, I am a somewhat ignorant and certainly discouraged investor.  In other words, I am just your average individual investor.

Although having some training in Economics many years ago in college.  My career has been in the Technical Professions and I am a Fellow at a large company that specializes in large system integration.  While I have succeeded in this profession, I have not had that type of success as an investor.  My initial reaction was that I was just not applying enough mathematical and statistical analysis to the market and hence a deep dive into technical analysis.  While this appealed to my scientific nature, it didn’t prove to be on the whole all that successful.

I had gotten out of the market a few months ago because a trading philosophy I had devised was whip sawing me.  I was trying to apply a swing trading theory that you should get out with a 2% loss (capital protection) and also to take profits at predetermined times.  While everybody else was making money, this approach using technical indicators I had back-tested and looked promising did not keep up with the S&P 500 index.  Looking back at this, I had decided I was pulling the trigger too quickly.  So, I decided on a new approach, once again very well back-tested, to apply a long/short ETF philosophy based on MACD crossovers that I would only trade on a weekly basis to avoid the whipsaw.  This new approach again couldn’t stand the almost schizophrenic movements of the market.

Why does application of mathematical and statistical approaches, that have served me well in my technology career, fail me in the Stock Market?  My conclusion I have come to is that in my profession, I understand the underlying principles of the various systems and how they interact.  I can go to a white-board and draw this and discuss how things work in detail.  When it comes to the Stock Market, in many cases, I can’t.  I am applying formulas  and technical strategies without thinking through why they should work from a fundamental economic perspective.  I simply do not have enough background or grasp of simple models to be successful in the stock market.  I basically have been applying a “voodoo” approach to investing by taking advice from “experts”.

Why should this interest you?  My confession of being ignorant should not matter to you at all.  The only reason you may have some interest is what I plan on doing is to start curing my current ignorant condition.  I plan on reading, studying and then blogging about what I think I have got a better understanding of.  So, if you are secretly an ignorant investor, like I am, you may be interested following this blog as I try to put a perspective on things.   So, come along on the journey as I try to get a basic understanding of the economy, stock markets and investing.  If nothing else help me sort it all out by commenting on what I am getting wrong!

I want to be wise, like Buddha,  when it comes to managing Mojo’s Money.

Categories: Uncategorized