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Americans putting faith, fortune in stocks

After three years of rapidly rising stock prices, American households have more of their fortunes invested in the stock market than at any time in the past 50 years - and perhaps ever.

Even that most prized possession, the home, has taken a back seat to stocks for the first time in three decades.An analysis by The New York Times of data compiled by the Federal Reserve shows that stock investments made up 28 percent of American household wealth - a measure that includes houses, cars and other tangible assets as well as financial assets - at the end of September, the most recent period for which data are available. And stocks accounted for 43 percent of financial assets, which include bank accounts, mutual funds and securities. Those numbers have more than doubled since 1990.

The implications of this profound growth in stock exposure are many. The size of their paychecks aside, many Americans are feeling richer as the value of their stock holdings rises.

But with so much in stocks, a sharp market decline could seriously erode the financial well-being of Americans, even if their money is largely tied up in long-term retirement plans. In years past, the biggest asset of most Americans was the home, making the real estate market far more important than the stock market in personal finance. Where skyrocketing home prices once provided reassurance to the middle class, soaring stock portfolios now do. And stock prices are subject to much wider short-term swings than home values.

The extra wealth from stock portfolios has also encouraged Americans to spend more and save less. The Commerce Department reported last week that the rate of saving fell last year to 3.8 percent of disposable income, the lowest level in 58 years. The saving rate has been dwindling since this bull market began in 1982 and is now less than half its postwar peak of 9.5 percent, set in 1974.

What Americans do set aside for saving, they increasingly allocate to stocks, rather than to more conservative investments. That heightened interest accounts for about a third of the increase in stocks' share of wealth, with the other two-thirds coming from the rise in share prices.

And the timing has been good of late. Stocks have been gaining 30 percent annually the last three years. "It's been jammed down their throats that they have to put their money in equities if they want anything left for retirement," said Melissa R. Brown, a stock market analyst at Prudential Securities.

Still, the situation could be fundamentally altered if stocks return to their historical gains of about 8 percent a year.

Concerns about how investors with bulging equity portfolios will react to a steep or prolonged downturn in stock prices have plagued Wall Street for several years. To allay fears of a panic, Wall Street analysts have often said that individual stock exposure is no greater than it was 30 years ago - though that estimate does not take into account many investment products that are gaining in popularity.

The extraordinary bull market has given few clues about what individuals will really do. For example, the brief but sharp decline last October became a buying opportunity for many.

The last time Americans had their faith in stocks truly tested was the stock market crash of 1987. Then, stocks accounted for only 13 percent of household assets - half as much as today - and Americans had more money in their savings and checking accounts than in stocks.

"Individuals certainly are taking more risk today than they were taking five years ago," said Scott L. Lummer, chief investment officer of 401 Forum Inc., which sells investment advice online. "A lot of that is for good reasons.

"But there is a growing set of the populace that looks at the last three years of returns and says, `The market goes up 30 percent a year.' I'm not sure those people really understand the risks involved in stocks, and because of that they may have a lot more money in equities than they should."