BOSTON (TheStreet) — Ethnicity and cultural background may play a large role in how people invest and save.
For instance: A majority of Chinese American households do not save enough of their income, choosing instead to invest the majority of their net worth in the stock market, According to a study by Rui Yao, personal financial planning professor in the University of Missouri’s School of Human Environmental Sciences, in a recent Journal of East Asian Studies.
It’s typically advised that at least three months’ worth of income should be saved and liquid in case of an emergency or income disruption. It’s a rule of thumb Chinese Americans seem to ignore, Rao says, despite the high savings rates found in China.
“Less than 50% of Chinese Americans meet the emergency fund ratio guideline, but [they] are also investing more than average,” she says. “Chinese Americans tend to have too much exposure in the stock market. In an emergency, stocks and bonds can be quickly sold and liquidated, but when the markets are down, like they are now, it is not wise to sell your stocks because you won’t get a good return back on them.”
Chinese Americans represent the largest group of Asians in the United States, yet relatively little research has been done on them, Yao says.
Similar studies have shown a similar, higher risk tolerance among Hispanic families, and less among whites and African Americans.
The differences may lie in the difference between collectivism and individualism, cultural traits that persist even after assimilation in American culture.
That’s among the conclusions presented in research that also focuses on Chinese Americans, by Meir Statman, a professor of finance at Santa Clara University’s Leavey School of Business, and Jessica Weng, director for Palo Alto, Calif.-based Nelson Capital Management.
They draw upon studies that have “attributed the relatively high investment risk tolerance of the Chinese to the ‘cushion’ provided by extended families in its collectivistic society.”
People are more willing to take risk in collectivistic societies than individualistic ones because they know their families will provide for them if they fail.
The United States ranks first among countries ranked by individualism, Statman and Weng say. They “do help parents who fall into poverty, but certainly not to the extent that parents are helped in countries such as China, where ‘filial loyalty’ is expected.”
A survey by the Transamerica centre for Retirement Research also shows that money-related attitudes can vary by ethnicity.
African Americans and Hispanics were found to have a more positive outlook for the U.S. economy and their own financial situation than whites. The survey also showed that African Americans were more focused on paying off consumer debt than whites and Asians. Asians were more likely than other races and ethnicities to prioritise paying off a mortgage and less likely than others to focus on just covering basic expenses.