Why do people invest in stocks?

I spent most of my career in wealth management and there, you constantly have discussions with clients about how much to invest in stocks and other assets. As part of these discussions, you start to understand that the reasons why people invest in stocks and how much are typically highly personal, which is why I have always emphasised the need to look into someone’s experiences to identify their risk preferences (let me know if you need a working paper version of this research and I’ll send it to you). Now, I am working on the sell-side and my clients are equity fund managers, so I don’t have to wonder about this question anymore. I just take it for granted that my clients have to invest in stocks.

However, it is always interesting to see empirical studies on why people invest in stocks. And Svetlana Bender and her colleagues have published an interesting survey with a twist. They asked 2,646 US investors with more than $1m in investable assets – so only private banking clients.

And their survey confirms a few of my observations that underpin my emphasis on finding out about an investor’s personal experiences. Two out of the top four reasons that determine why and how investors invest in equities are their personal experiences investing in the stock market and living through the market ups and downs. The other two are recommendations from a professional adviser and the years until retirement for those who are not retired already.

Top 10 factors that determine equity allocation for wealthy investors

Source: Bender et al. (2020).

Note that so many of the arguments we preach why investors should invest in equities don’t feature at all in the top 10 shown above. Equities as an inflation hedge? Not really all that important. Stocks as part of a diversified portfolio with correlation benefits relative to other asset classes? They don’t even know what you are talking about. Dividends as a source of income? Doesn’t even register.

In the end, investing is a highly personal endeavour and advisers and asset managers should treat it that way. Finance theory, models and “rational” or “objective” reasons to invest in stocks are all fine, but when the rubber hits the road it is personal objectives, expectations, and experiences all the way.