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Economists Joseph Tracy and Henry Schneider argue that exceptionally high returns on stocksrather than aggressive investment behavioraccounted for much of the increased importance of stocks as a household asset in the 1990s.
Countering the view that vast numbers of Americans were eagerly buying up stocks during the period, Tracy and Schneider suggest that the average household reacted to market developments "sluggishly." According to Tracy and Schneider, most households that owned some stocks during the period did not rush to buy more and most households that held no stocks refrained from acquiring them.
Using data on individual households from the Federal Reserves Survey of Consumer Finances, Tracy and Schneider estimate that the average share of household assets devoted to stocks increased from 5.0 percent in 1989 to 11.6 percent in 1998. Their statistical analysis shows that 53 percent of this rise was attributable to the high returns on stocks. Changes in investment behavior, by contrast, accounted for only about 18 percent of the rise in the average household equity share.
Tracy and Schneider find that three other factors contributed modestly to the increased prominence of stocks as a household asset:
the vast number of "baby boomers" (age 40 to 59) providing for retirement,
the broad improvement in the populations education level, and
the restructuring of retirement plans to allow workers to invest their contributions in equity funds.
Having shown that most households responded quite passively to the high equity returns of the 1990s, Tracy and Schneider suggest that the typical household may behave in a similarly languid fashion if market returns over the current decade drop below their historical average. The average household equity share is likely to fall, according to Tracy and Schneider, but by less than it would if investors as a group were hastily abandoning the markets.