Ever since we started this blog, I have been tirelessly promoting the importance of wealth management at an early age among our friend circle. However, whenever I mentioned the stock market to my immigrant friends, I often received an interesting reaction–they either assume that investing can wait till they are more established or profess complete ignorance about financial management. I found these pretexts to be quite familiar, having expressed similar ones myself not too long ago. In “Why You Should Start Investing in the Stock Market in Your Twenties,” for example, I shared my misconception about not being able to afford the stock market. Considering the commonality between our reactions, I suspected that this might be indicative of some bigger trend with how immigrants make financial decisions. Therefore, I have turned to research in financial economics and behavioral finance to find out how immigrant households differ from native households in the U.S. Below is a brief synthesis of various research studies published by renowned economists. In pointing out the characteristics of immigrant households when making financial decisions, I hope that immigrant households will reconsider their portfolio choices and investment strategies and rediscover ways to build their wealth.
Immigrant are less likely to own financial assets such as stocks and mutual funds compared to native-born Americans.
Research has indicated that immigrants have lower participation rates in financial asset holdings, especially stocks and mutual funds, when compared to native-born Americans, though it was also noted that the disparity is negligible when it comes to home ownership (Chatterjee, 2009). Various reasons are believed to work together to generate the difference in financial asset ownership between immigrants and their native-born American counterparts. Income disparity, for example, is considered one of the most prominent factors that has contributed to this difference. On average, the mean household income for native households is slightly higher than that of immigrants. In fact, income disparity is often correlated with other contributing factors, including net worth, risk tolerance, and educational attainment. An immigrant whose disposable income is lower than a native-born American counterpart is less likely to have a higher net worth, as we know that net worth generally increases as income increases. Therefore, immigrant households on average tend to have a lower financial market participation.
As immigrants stay longer in the U.S., their asset market participation rates become higher.
Nonetheless, immigrant participation rates in the financial market increase as they stay longer in the U.S. Data have revealed that the duration of an immigrant’s stay in the United States is positively associated with an increase in financial wealth over time. Seto and Bogan (2013) attributed the increase of immigrant participation to a reduction in information costs (i.e., expenditures of time, effort, and money required to obtain information). They reasoned that immigrants who spend more time in the U.S. are more likely to improve their language ability and gain more knowledge of American investment options.
As an immigrant who has been in the U.S. for a decade, I agree that what Seto & Bogan (2013) have discovered is typical of many immigrants’ investment experiences. I did not own any type of investment until the latter half of my 20s. My belated arrival at the investment scene was in part because I, then an international graduate student, was not familiar with financial products and services in the U.S. In addition, back then I was unsure if I would stay in the U.S. permanently, so I thought it was unwise for me to invest in a retirement account or attempt any long-term financial planning. I did not recognize that my shorter planning horizon would cost me. In discussing the non-cognitive skills that accounted for the relative lower stockholding among immigrants, Luik and Steinhardt (2016) argued that native-born citizens tend to have a long-term financial planning horizon, which in turn also renders them more risk tolerant, when compared to immigrants. Similar to my experience, non-citizens, especially those on a contingent visa, are less likely to own securities as compared to more established immigrants. Nonetheless, as their length of stay increases and their immigration status stabilizes and becomes permanent, they invest more proactively, as both their knowledge and economic condition improve as a result of their associated ability to live and work in the U.S.
Immigrant households’ financial asset holdings vary by country of origin.
Although on average immigrant households invest less than native households, there are variations between immigrant households based on country of origin. It is no surprise that immigrants demonstrate differing propensities in terms of financial asset holding at the country of origin level. Even though immigrants leave their home countries for a brand new start in the U.S., their prior experience in their home countries, including their exposures to financial markets, will continue to affect their judgements. In other words, their prior experience acts as a “cultural basis” for their investment decisions. For example, Central American, South American, and Caribbean immigrants are noted to lag behind other immigrant groups in partaking in the asset market, when their participation rates in home countries are negligibly low too.
Moreover, the country effect extends its impact on portfolio choices. Among immigrants from Europe, those from Italy and Romania are significantly less likely to own stocks, while those from Ukraine and Yugoslavia are significantly less likely to hold mutual funds. U.S. Savings Bonds are the least favored investment option for German, Italian, Polish, and Russian immigrants, whereas it is, along with other fixed income securities (e.g., treasury bills, corporate bonds, and municipal bonds), a preferred option for Eastern European immigrants (though this data may no longer reflect the changing attitudes of recent immigrants because Seto & Bogan’s research was based on longitudinal data from 2001 and 2003). Likewise, a study conducted by Kim, Chatterjee, and Cho (2012) to investigate Asian immigrants’ asset ownership reveals wide variations among the group’s six major ethnic sub-groups.
However, it is difficult to generalize patterns of immigrant investment participation by region of origin. Variations exist within broad regions of emigration. For example, recent immigrants from India and China invest heavily in financial assets, whereas their Southeast Asian counterparts such as Indonesians and Vietnamese are less likely to own financial assets. Understandably, a host of factors attributable to the home country and its culture could interfere with an immigrant’s financial behaviors, which are often times further complicated by the immigrant’s experience in the U.S. Even though participation rates in the home country are found to be positively correlated with immigrants’ financial activities in the U.S., immigrants from Hong Kong are significantly more likely to hold stocks than native-born Americans, despite the low rate of participation in Hong Kong compared to the U.S. In fact, immigrants from Hong Kong probably benefit from their English-speaking educational background and relative familiarity with financial markets because their stock market has historically had strong ties to the American financial center in New York.
Immigrants from countries with greater information exchange and contact with the U.S. are more likely to invest.
Although there are wide variations in terms of immigrants’ financial asset ownership and allocation at the country of origin level, economists have acknowledged the significance of information costs and information access in driving proactive investment behaviors. Generally, immigrants from countries with greater informational exchange and contact with the U.S., such as English-speaking countries and those with financial markets highly interlinked with the U.S., are more likely to invest. For example, immigrants from Western Europe (e.g., UK and Sweden) tend to share their native-born American counterparts’ investment patterns. By contrast, immigrants from countries with limited financial market connections to the U.S. (e.g., Romania, Indonesia, Cuba) have significantly lower participation rates.
Research indicates that English fluency is positively associated with asset ownership and economic participation of immigrants (Chatterjee and Kim, 2011). In other words, immigrants from English-speaking countries are usually at an advantage because English fluency allows them to more conveniently gather information necessary to participate in the stock market. For immigrants with limited English fluency or lack of fluency in English, complicated financial products and services could be overwhelming. In addition, English-speaking immigrants presumably have lower information costs and wider access than those who don’t speak the language should they choose to invest in any asset class, especially stocks–the most risky and information-intensive type of investment (Seto and Bogan, 2013).
Immigrants from countries where financial markets are well-developed and hold strong ties to the U.S. market are also more likely to reap the gains from owning financial assets. When the level of financial development in the home country is similar to that in the U.S., immigrants are more likely to translate their investing knowledge into actual gains. According to IMF’s Financial Development Index, Western European and a select number of Asian markets are close to the level of development in the U.S., whereas markets in Central and South America lag far behind. Barring language, the lack of familiarity and experience is to blame for the consistently low participation rates among Central American, South American and Caribbean immigrants for different asset classes.
Although it may appear to you that risky asset participation, such as financial asset ownership, is imperative to wealth accumulation, research suggests that it may not be common knowledge among immigrant investors.
In this article, I tried to provide a preliminary understanding of how immigrants invest and to summarize how their financial decisions are affected by a combination of factors including income disparity, length of stay, country of origin, English fluency, and investing knowledge. Although findings in the research mentioned above were primarily generated for a scholarly purpose, they also afford a new perspective for immigrant investors, like me, to re-evaluate our financial decisions and investment portfolio in relation to us being immigrants so that we can choose alternative avenues of investment to maximize financial gains in the future. To illustrate my point, say, if you believe that your language ability restricts your access to information, seek out a financial advisor who speaks your preferred language. Or, if you feel reluctant about maxing out your 401(k) contribution because you are uncertain if the U.S. will be your permanent home, invest in the stock market instead and let time work its magic.
In addition, the research has led me to believe that government leaders and policy makers should implement financial awareness programs to close the knowledge gap between immigrants and native-born citizens and devise financial policies to reduce the income inequality and wealth gap between immigrant and native households. Although I am not in the position of implementing policies to encourage immigrants’ asset market participation, I believe that our blog will provide some useful tips about investment for anyone, including immigrants.