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Americans' passive participation in the stock market


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#1 Just_One_Question

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Posted 02 September 2017 - 08:06 PM

Hey, guys, some time ago I've read statistics that around 80% of the American people own stocks and that the largest holder of US stocks is the nation's pension funds. However, I've also seen that a relatively lower percentage of Americans, around 20%, know the basics of the stock market and how it functions.

 

My question is, if relatively few people know how to trade stocks, then how come so many people are able to do it, as shown by statistics? Clearly, someone is doing it for them. Who? Most of the American people's funds that are held in stocks are part of their 401k and Roth IRA pension plans. I am guessing that once you start a job in the US, the bulk of your taxes are automatically put into a pension plan by your employer and then managed by a fund, such as Vanguard or BlackRock, unbeknownst to the actual worker. Am I correct, grossly wrong, not even in the correct lane of thought? Please, help me to understand.

Thank you!:)

 

P.S. By the way, fun game, I legit challenge you to find a NYSE American stock which doesn't have either Vanguard, or BlackRock as the biggest non-insider holder. Honestly, I don't think I've ever seen one, which is unsurprising, considering that those 2 firms have a combined AUM (assets under management) of more than $10 trillion - more than half of USA's GDP in comparison.:)



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#2 mjd420nova

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Posted 02 September 2017 - 10:29 PM

I think your challenge needs to check out GE.  I participated in s tock and mutual fund program as part of a saving/pension program from the 70's  I actually hold stock certificates and will probably pass them on in my estate when I leave this world.  Pension plans are big stock holders along with mutual funds but the average person goes through a broker to buy and sell.



#3 Just_One_Question

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Posted 02 September 2017 - 10:42 PM

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#4 britechguy

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Posted 03 September 2017 - 10:37 AM

JOQ:  "Your taxes" go to the government, not your employer.  It's almost certain that a portion of taxes, particularly things like Social Security taxes, end up being invested at least partially in the stock market, but mostly in the bond market.

 

These days fewer and fewer employers have what are known as "defined benefit pension plans."   This was the standard for many, many decades because it was recognized that "most people" will not plan adequately for their own retirement and a portion of the employee's pay, plus (often) some matching funds from the employer, were put away in a professionally managed fund that mixed stocks, bonds, and other investments such that a set monthly amount would be able to be drawn from that fund for a given employee when they retired.  Since there was a constant flow of new hires and retirees there was a constant infusion of cash from the currently working that supported the benefits for current recipients.  I am actually old enough (and just) to have begun drawing on my defined benefit pension plan from 10 years of employment in the telecommunications industry from the mid-1980s through the mid-1990s.

 

Defined benefit pension plans met their demise as a common benefit for a number of reasons.  They were not adequately regulated, so certain unscrupulous companies that had these raided them to keep themselves afloat when lean times hit, then often bankrupted not only themselves but their employees' pension plan.  This resulted in regulations where pension plans had to be completely separate business entities from the companies that establish them.  Then there were (and still are) issues where some pension plans were mismanaged and woefully underfunded based on projections of what would need to be withdrawn for benefits.  And, finally, but rare, you have situations like the United States Postal Service where, as a reaction to some of the woefully underfunded situations, have been forced by legislation to have to swing completely in the opposite direction and grossly overfund their pension plan based upon any reasonable actuarial projections, which leads to cash flow issues in the present.

 

Of course, just like the social compact where employers were loyal to their employees and the communities they operated in, and vice versa, has all but vanished companies were more than happy to find ways to kill off the defined benefit pension plan altogether, and one of the biggest ways they did this was with the introduction of the 401K plan.   I loved the 401K, and it is what I will be living off of in my "golden years," but I was the very odd 20-something who, having watched people I grew up around who were skilled laborers often suffer in their retirement years because they either didn't, or most often couldn't, put anything aside, socked away the maximum amount I could in my 401K, and always put in at the very minimum the maximum amount on which my then employers would also contribute matching funds.  In the go-go 1980s through mid 1990s that was a 50% match up to the maximum amount for matching, which was not insignificant.  Who wouldn't want to sock away say, $10K per year when that translated to $15K per year after matching?   But, most 20-somethings are not thinking that much past their next paycheck for the next "cool thing" that they want to accquire, let alone to their retirement years, and nothing goes into their 401K, or very little does.  Getting started on retirement savings early is about the only thing that allows one to amass enough to actually retire if one is self-funding, and these days almost everyone is back to self-funding their retirement.

 

Social Security, which is the barest of social safety nets, recognized that "the great unwashed" either cannot or will not have the foresight to put any savings aside for their own retirement.  It has been one of the primary drivers in the eradication of abject penury that once was very common among the elderly in the United States.  But it is very, very difficult to live on Social Security benefits alone virtually anywhere.

 

There are very few people who own significant amounts of straight stock and those who do are generally either heirs/heiresses or among the uppermost in the wealth spectrum.  The rest of us own stock through mutual funds and/or annuities, which are professionally managed.  I would not want to be picking and choosing my own stocks simply because I don't want to have to be watching the markets that closely on a day to day basis and doing all the trading that's necessary to keep a stock portfolio balanced and earning the most it could be.  I'd far rather that be in the hands of those who love doing just that, provided they do it well, and let them do the day to day portfolio management for myself and thousands of others.  There is strength in numbers/size and the benefit of professional expertise that I will never have myself.


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#5 Just_One_Question

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Posted 03 September 2017 - 11:04 AM

That was perfect, thanks!

Getting started on retirement savings early is about the only thing that allows one to amass enough to actually retire if one is self-funding, and these days almost everyone is back to self-funding their retirement.

I don't know where you got this information from or if this is just your view on things, but I have seen an interview with a member of either BlackRock or Blackstone (I always get them mixed up) on Bloomberg TV some time ago and she literally said that they did an extensive research that provided results the same as in your statement. It is absolutely correct - the bulk of the median American's retirement comes from savings first and foremost. :thumbup2:

 

I have 2 follow-up questions to which I suspect that I know what the answer is, given the free nature of life in America in general. Can you pull out funds from your retirement accounts, such as 401k, early? Pretty sure the answer here is yes, but you'd incur some sort of a penalty, which was designed in order to prevent people from ruining their own lives, but I just want to be sure, since that is not allowed in Bulgaria, for example (Well, it is allowed, but you get a huge penalty from doing, usually in the nature of ~50% less than what the actual amount was in the fund for your personal retirement).

You talked about that as well, but are you allowed to fully manage the capital in your 401k account or do you must by law assign at least a portion of it to someone else or the government to manage?

 

Well, that's it. Thank you! :)


Edited by Just_One_Question, 03 September 2017 - 11:06 AM.


#6 mjd420nova

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Posted 03 September 2017 - 01:50 PM

Pensions provided by the employer have really been gone for some time.  Yes, some pension plans will allow members to withdraw cash amounts from their accounts but these monies are only up to a certain point, the amount the member paid as the amounts paid by the employer can not be disbursed except by the months payout schedules.  And any amounts withdrawn are subject to hefty taxes beyond the normal state and federal withholding amounts.  Same thing applies to most 401K plans but each is a little different and has different plans and schedule payouts.  One thing with a 401K that might interest some is that the amount in the account can be used for a home purchase for the members to live in and it would be tax free then.



#7 Chris Cosgrove

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Posted 03 September 2017 - 06:41 PM

MJD #6 has pointed up something I said in another topic - tax laws vary incredibly from one country to another.

 

If I, living in the UK, was to retire tomorrow and had an active pension plan I could withdraw a significant amount as a cash lump sum - approximately one year's salary - tax free in comparison to the 'hefty taxes beyond the normal'  that he refers to. Taking this cash sum naturally reduces the amount you will receive as an annual pension.

 

It then depends, assuming you have no urgent need for this cash sum, on you making a bet with your self. How long do I have to live for my total earnings to be greater without this cash sum, and what are my chances of living this long ?  This is of course just a variation on the same bet the pension funds are taking !

 

Chris Cosgrove



#8 JohnC_21

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Posted 03 September 2017 - 08:22 PM

The company you work for should tell you what company is administering the 401k be it Fidelity, Vanguard, etc. They will also tell you what specific funds are offered which always will include a money market fund.






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