‘Safe’ CDs pay zip. So why not buy stocks?

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Why are Americans so down on stocks while the market has soared so high?

Bankrate reported recently that more than half of Americans don’t own any stocks or stock-based investments. Now, in a new Financial Security Index survey, 76 percent of Americans say low interest rates on savings accounts and CDs don’t make stocks any more appealing.

The level of disinterest in stocks has remained virtually unchanged since Bankrate started asking the question in 2012, even though the stock market has soared. The Dow Jones, Standard & Poor’s 500 and Nasdaq have posted gains of 33 percent, 45 percent and 56 percent, respectively, since April 2012. In those three years, yields on one-year CDs have fallen 18 percent, five-year CDs by 23 percent, and interest rates on money market accounts have fallen 31 percent, according to Bankrate.

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It boils down to trust

One reason for the tepid response is that, no matter how big the bull market, many Americans remain skeptical of stocks. The recession is certainly one of the sources of that distrust, though Cornell University economist Vicki Bogan says many people were simply raised with a negative opinion of Wall Street. Whatever the reason, it takes more than a recent jump in value to change their minds.

Bogan says a lot of people don’t change their opinions on investments until they’ve gone through some kind of big lifestyle change, such as becoming a parent or earning significantly more money. Even people who want to start investing in stocks experience doubts and often give up before they really begin, she says.

Bogan recently led a financial literacy workshop at Cornell’s Institute for Behavior and Household Finance, where she’s director, and brought up exchange-traded funds as an option for beginners.

“People don’t know what that is,” she said. “They don’t know how it differs from a regular mutual fund.”

Bogan added: “When you buy financial products, there are fees attached to them. That makes people reticent to buy them, especially when those fees and transactions costs aren’t always transparent.”

The kinds of big life changes that push people to brave uncharted waters and learn about stocks don’t happen quickly, she says, so it makes sense that most consumers hold onto their investing habits for a very long time.

The big picture

The survey that accompanied Bankrate’s April FSI found a variety of additional details about the investing appetites of Americans. For example:

  • One in 5 Americans is more inclined to invest in stocks when interest rates are low on savings accounts and CDs.
  • The more educated that people are, the greater their interest in investing. Among college grads, 35 percent were “more inclined” to invest; only 11 percent of those who never attended college responded the same way.
  • The bigger the salary that people make, the greater their interest in investing. One-third of those who made $75,000 or more were more inclined to invest, compared with 11 percent of those who made under $30,000.
  • Men were more interested in investing, with 24 percent of them saying they’d be more inclined to invest, compared with 17 percent of women.
  • The youngest survey takers, a group that includes millennials between 18 and 29 years of age, were the least interested in the stock market. Seventy-eight percent said they’re not looking to Wall Street as an alternative to CDs or savings accounts.

The survey was conducted April 1-4, 2015, by Princeton Survey Research Associates International and included answers from 1,000 adults in the continental U.S. It has a margin of error of plus or minus 3.6 percentage points.

The young and risk-averse

Those who avoid the stock market, especially young ones, could be toying with a double-edged sword, says Greg McBride, CFA, Bankrate’s chief financial analyst.

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“I often point out that I know millennials who’ll drive 90 miles per hour in the rain while texting, but they’re afraid to put their 401(k) contributions in the stock market because they think it’s risky,” he says. “Now they’re dealing with the risk they’ll get in at the wrong time, and that risk grows every day.”

Banks and traders have spent a lot of marketing dollars to get millennials interested in financial products. Although millennials complain about low wages and high student debt now, the finance industry knows that generation will wield significant influence in the next couple of years, McBride says.

But so far, a lot of them have been reluctant to apply for credit cards or invest in stocks. A majority of 18- to 29-year olds showed a lack of interest in the stock market, according to Bankrate’s latest survey. McBride says one of the reasons for that is the Great Recession, an elephant that might not leave the room for a long time.

“What we typically see after a sharp drop is people get skittish, and many of them bail out at the market’s bottom, then sit on the sideline and watch the market go higher,” McBride says. “They finally decide to throw in the towel and get back in, usually just in time for the next market drop.”

Timing is everything

The drop that McBride talks about could happen anytime. Bull markets always fade, and some experts warn that the millennials and other first-time investors may have already missed their chance to get in on the post-recession boom.

“At this point in the cycle, we think stocks are quite expensive, so it’s probably a good thing that people are avoiding them now,” says Mebane Faber, chief investment officer for Cambria Investment Management in California.

In December, Faber’s firm launched a new exchange-traded fund. One of its key features: It removes the allure of emotion-based decision-making by rebalancing the portfolio each year to counteract swings in the market. In two months, the fund has raised $30 million, he says, a sign that there’s demand for a product that protects consumers from their own emotionally driven impulses.

“People were most bearish on stocks in March 2009 and most bullish in December 1999,” he says, “literally the two most unfortunate times to have made those kinds of decisions.”

Faber thinks there’s little harm in people being honest about their risk tolerance and investing accordingly. He should know — he’s seen his own mother forgo stocks entirely.

“My mom, for example, is perfectly happy to sit her money in CDs and fixed income investments because she’s able to sleep at night,” Faber said. “We’ve seen U.S. stocks decline 90 percent very rapidly before. People remember the very real pain of the last two bear markets. I see no problem with them holding onto their cash.”