I went from “I’m young. 100% equities is fine because I have plenty of time.” to “Age in Bonds”.

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Matt SF Reply:
January 14th, 2010 at 9:40 pm

Donnie,

Just be careful about the “sector rotation” effect when/if it occurs.

If a few of the major investment banks start to reallocate their investment portfolios by selling bonds and increasing stakes in equities because of valuation (like Bank of America Merrill Lynch did today), we could see a sell off in bonds and a further rise in equities.

Just something you should know if you’re 100% invested in a single asset class.

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Forgive me for I won’t repent :).
I’ve been pumping more money into stocks since last year. It’s true that we’re not bothered by inflation (if you live in a developed country) since the number has been small and rather stable (only one digit), but as for risk aversion, I think the survey result is biased in term of timing. If they do it again in 6-12 months when the market rallies and economy recovers, I think the result will be different. What do you think, Matt?
.-= Bytta @151 Days Off´s last blog ..Day 6: Four Reasons I’m Not A Diva (And Neither Are You) =-.

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Matt SF Reply:
January 15th, 2010 at 7:29 am

Bias is a great point, and I’d agree that timing has a lot to do with these results (just like the Gen Y prefers used cars vs. new cars study posted earlier this week).

I have a suspicion that younger people are smarter consumers than their late Gen X or Baby Boomer counterparts, but I also think their (I should say – our) susceptibility to short and intermediate term stimuli makes us more likely to changing our short term behaviors only to change them again when the next big thing happens.

As for what I think, the market has already rallied significantly in 2009. So the doom & gloom news has abated by in large. My fear is that with everyone flocking into risk averse assets like bonds, they might take a hit because everyone else on Wall Street had the same idea and began herding into bonds driving up prices (see the money flow rates into bonds in late 2009). So that’s where techniques like portfolio re-balancing needs to be used so that no one asset class gets too big (by appreciating too much) and be sold off at the highs and roll those profits into assets that saw a decline. This is just my non-professional opinion of course.

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Isn’t everything about balance? Some of the reasons behind the ridiculous bubbling in the last ten years had a lot to do with all of the eggs flowing into a particular basket (depending on the trend) until the basket gave way under an unsustainable load. My hope is that Gens X and Y can learn from this and move toward a more balanced world view, both financially and environmentally. And I can sit on the porch in my rocker, with my money tucked under the mattress in the next room, cheering them on.

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I will concur with the survey. I’m VERY risk adverse, since I’ve gone through two stock market busts, and of course a real estate bust.

I strongly believe that 4% is a good enuf long run return, and the way I’m going to get wealthy is simply through hard work and savings.

If my 401K and private equity investments bomb, so be it. People’s net worths are illusions. Cash is just fine.
.-= Financial Samurai´s last blog ..Where Americans Pay The Most To Live And Why =-.

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I agree with Financial Samurai, that chasing yield thing will come to no good end. We’ve all heard the saying, “little pigs become fat pigs, and fat pigs get slaughtered”. So it is with those for whom yield is the driving force.

I’m in that 40s/50s range who are less risk adverse, though I am risk adverse, at least relatively speaking. A lot of how any generation perceives something will depend on how things went early in your life.

If, like the current 40s/50s, you experienced consistent double digit growth in stocks for two decades, your view of stocks will be skewed toward the positive. Any history prior to your time will be ignored. Now reality is very different from our individual views, so I think the 20s/30s are on much firmer ground with a more conservative view.

The 20s/30s are displaying a respect for the volitility of the stock market that it richly deserves, that many baby boomers lack to their own peril.

Matt, congratulations on writing a post on stocks that isn’t overflowing with blind optimism. Regrettably the PF world tends to do too much cheerleading in regard to the stock market as though it’s a place for guaranteed returns. (If only that were true!!!) But we have the mainstream financial media doing that, and PF sites are where we should come to talk about reality!
.-= Kevin@OutOfYourRut´s last blog ..The High Cost of Convenience =-.

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Tracy hit the nail on the head. That is what’s caused the situation we’re in. In the past 20 years we’ve had a prior real estate bubble (last one took 10 years to recover), stock market bubbles, then we had the internet bubble – every one of them followed the same path and with the same result. I think the current one is a mega-whammy in that we got a real estate bubble, a stock market bubble, and an economic bubble all rolled into one.

This one is going to hurt more than past ones in that those guilty of the sins was more widespread than previously and those people were leveraged to the hilt to buy overpriced real estate, maxed out on credit, and now they’ve lost their jobs. People like Tracy (and myself), are well diversified, don’t have nosebleed levels of credit card debt, and own a home we can easily afford. Moderation is the key and having a well-balanced financial framework. I don’t think this is a generational issue at all – it has to do with mindset. Maybe Gen Y is more aware of things today, however, when the tide turns, my crystal ball says they will be no different than prior generations. You will have those who do look for balance and moderation, and you will have the rest who will spend and take on more leverage than they can safely manage.

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Guess I buck the trend then. I’m 100% in equities and when the market crashed I kept my allocation the same (I’m comfortable with my range of large cap/mid cap/small cap/international) and even upped my contributing percentage a few points. So I recovered what I’d lost in about 6 months after the low, and now a year out I’m almost two times what my highest balance was before. I’m not comfortable running to Bonds right now because I don’t think in the short term they’re going to be any more stable than stocks. So I’ll wait a few years while the market goofs around (and it MAY drop again in the meantime) and probably have a 5 or 10% bond allocation when I hit 30. Give it 5 years of good returns and everyone will forget how horrible the crash was and run back to stocks.

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Matt SF Reply:
January 21st, 2010 at 2:08 pm

Sounds like you played it well! Excellent work!

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I buck the trend as well, although I didn’t start investing until almost the absolute bottom of this last crash (and so haven’t really felt the sting). I’m about 90% in equities right now.

My biggest regret? Not being more aggressive with my employer-matched funds to start with. I’ve have an aggressive portfolio there for a few months, but wish it wasn’t moderate for the first half of ’09.

Then again, I have 40+ years before I hit “normal” retirement age… I’d rather start worrying in 20 years or so.

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Matt SF Reply:
January 22nd, 2010 at 1:22 pm

All good points Rae. If you’ve missed the sting, you’re probably not as cautious or as jaded as most of us.

The only thing I would suggest, since you’re obviously on the right track, is to do what’s necessary now so you don’t have to worry (or worry as little as possible) 20 to 40 years from now.

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