Steadfast FinancesYounger Investors Become More Risk Averse than Older Investors

Younger Investors Becoming More Risk Averse than Older Investors

Filed in Index Funds , Investing 101 , Peer to Peer Lending 14 comments

Some interesting, perhaps troubling, results from the Merrill Lynch Quarterly Affluent Insights Survey this morning.

Younger investors are more risk averse than older investors. Those in their 20s and 30s are more risk averse than the 40s and 50s demographic because they been burned twice in the last decade.

Older investors are more concerned about inflation, where younger investors aren’t as concerned because they haven’t experienced it [inflation] yet.

I don’t particularly find these findings all that surprising because:

  1. I’m a late 1970s Gen X’er and I get a bitter aftertaste in my mouth when I speak/write about the Bubble Decade. Which is why I’m looking at basic low cost index funds for my retirement accounts to save as much money on investing fees as possible while getting a ROI equal to the broad market index. I’m also looking into alternative investments like Peer to Peer Lending for a more consistent return in the 10% range, which I was quoted (I say this sarcastically because I was never guaranteed anything), by financial experts way back in 1999 saying 10%+ was the average annual ROI based on historical stock market performance.
  2. Not that many people, particularly young people, understand how inflation affects them. Mark Dice proved this by convincing a majority of random Americans on the street that 100% inflation was good for America by signing a ridiculous fake petition.
  3. Gen X and Gen Y may resemble the post Great Depression demographic in that they avoided investing in the stock markets altogether. Presumably, it’s because they (and perhaps the current 20s and 30s age demographic) were burned so many times by the Wall Street crowd. After experiencing 3 major bubbles in a decade (e.g. tech bubble, real estate bubble, oil bubble, etc.), it’s a highly believable result since we just lived through the second worst stock market performing decade in history.
  4. Older investors want to make their money back. I’ve spoken to several older investors who went from talking about early retirement to might not being able to retire at all. So not surprisingly, they want to increase their risk in order to boost their account balances before punching their final time sheet.

So whats your take on the survey results?

Do you have more anxiety about investing in the markets than you did 5 to 10 years ago? Are you holding money back, or are you calling the skeptics a bunch of wussies and staying the course?

If you enjoyed this post, make sure you subscribe to my RSS feed!
Posted by CJ   @   14 January 2010 14 comments
Tags : , , , ,


Jan 14, 2010
3:04 pm
#1 Donnie :

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

Jan 14, 2010
9:40 pm
#2 Matt SF :


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.

Jan 15, 2010
7:29 am
#3 Matt SF :

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.

Jan 15, 2010
10:41 am
#4 Tracy :

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.

Jan 15, 2010
11:48 pm

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 =-.

Jan 16, 2010
1:27 pm

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 =-.

Jan 17, 2010
4:05 am
#7 Joe :

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.

Jan 21, 2010
2:04 pm
#8 FrauTech :

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.

Jan 21, 2010
2:08 pm
#9 Matt SF :

Sounds like you played it well! Excellent work!

Jan 22, 2010
1:03 pm
#10 Rae :

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.

Jan 22, 2010
1:22 pm
#11 Matt SF :

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.

Dec 7, 2010
7:25 pm

This trend is interesting to me both as a practicing financial advisor and as the parent of a 22 year old who is newly eligible for her company’s retirement plan at her first job after graduation. I can’t say I blame younger investors for being gunshy after the events from 2000-2009, but this may prove detrimental for their longer-term financial well-being.

Dec 7, 2010
8:14 pm
#13 Matt SF :

Definitely. I’ve had the risk adverse conversation multiple times since posting this, and the best counterargument seems to be informing people how much more they’ll have to save, or dare I say, how austere their live will have to be, if they’re only earning low interest rates in fixed income vs. higher single digits in equities.

Trackbacks to this post.
Leave a Comment




Previous Post
Next Post