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America: A Society of Equity Investors

Since the 1980's, the number of American households that owns equities has almost tripled. Today, nearly 57 million, half of all U.S. households, own stocks directly or through mutual funds. This is according to the third joint study on "Equity Ownership in America," by the Investment Company Institute of Washington and the Securities Industry Association of New York.

The study was conducted by the Boston Research Group this past January, under the direction of both the ICI and the SIA. The research was done via telephone interviews with 2,414 equity investors.

Among the survey's key findings is the fact that equity ownership among U.S. households has increased substantially over the past 20 years. In 1983, 15.9 million households, or 19% of all U.S. households, owned equities. In 2002, 54.1 million households, or 49.5% of all U.S. households, owned equities. This year, 56.9 million households, or 50.3% of all U.S. households own equities.

The survey also showed that most equity-owning households own stock through mutual funds; 90% of equity-owning households invest in stock mutual funds, and nearly half own individual stock.

The growth in equity ownership can largely be attributed to the increase in the usage of defined contribution retirement plans, such as 401(k) plans, as participants take part heavily in equities inside these plans. The shift from traditional pensions, or defined benefit (DB) plans, has propelled the increase.

"Today, nearly half of all equity owners began investing in equities by purchasing stock mutual fund shares through retirement plans at work," the report noted.

Also of interest, the study showed that investors have shown resiliency through the bear market. The number of individuals owning equities is up 5.2% since 2002 and 14.4% since 1999, the year in which the first ICI/SIA study was conducted.

Although the number of households owning equities is on the rise, it has begun to grow at a slower pace. For example, between 1995 and 1999, the number of households owning equities rose by 24.5%, while between 1999 and 2002, it rose 8.6%, and between 2002 and 2005, it rose 5.2%.

The study concluded that the percentage of employees covered by defined contribution plans has grown more slowly in the past 10 years, and this has a direct effect on equity ownership. Also, the number of households owning individual stock inside employer plans decreased a little after 2002, which has also dampened the increase in equity ownership.

The average equity assets of households owning either individual stock or stock mutual funds is $65,000 for 2005, and this figure represents more than half of their financial assets.

Six out of of every 10 investors under the age of 35 have purchased stock mutual funds in retirement plans, as these investors' objective is asset accumulation. For those investors who are 65 or older, most of these investors initially invested in equity outside of employee plans, as an older investor's objective is to invest in income-producing investments.

Older investors are more likely to own individual stock, and younger investors are more likely to own stock mutual funds, according to the report. Older investors are also more likely to hold equities in taxable accounts, while younger investors are more likely to hold equities in tax-deferred accounts.

Three quarters of equity investors age 65 and older own equities in taxable accounts, and this represents the vast majority of their equity assets. Because many older investors began their careers before the introduction of defined contribution plans, 21% of those investors who are 65 and older made their first equity purchases through mutual funds inside of employer-sponsored plans. For younger employees, 61% made their first equity purchases through mutual funds inside work retirement plans.

"As the U.S. population ages, the financial services industry most likely will need to adjust its mix of products and services to accommodate the financial needs of older investors," the report said.

The survey also found that equity investors have more diversified portfolios in 2005 than they ever did before, as a greater number of investors today hold foreign equities, through ownership of international or global stock mutual funds. Also in 2005, more investors also own hybrid mutual funds, annuities, investment real estate, individual bonds and bond mutual funds.

Of all equity investors, nearly three-quarters hold equities outside retirement plans, and financial advisers are the main conduit to equity ownership outside employer-sponsored plans, the report pointed out.

"Nearly two-thirds of equity investors who have consulted financial advisers within the past five years rely on one adviser for investment guidance, usually a full-service broker or an independent financial planner, with whom they typically confer twice a year," the report noted.

Forty-one percent own equities solely though advisers, while 36% hold equities purchased through both advisers and direct sources, and 23% own equities through direct sources only. The reason investors hold a higher percentage of equities when they have purchased them through financial advisers is because they help investors select investments that fit their financial goals and risk tolerance, the report said.

The sex of the investor, or household decision maker, has a big influence on whether or not the household owns equities directly through advisers. The study revealed that 51% of females who are the sole investment decision makers, own equities through an adviser, while only 37% of males who are the sole investment decision makers, own equities through an adviser.

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