Are investors under 40 too risk averse?

May 26, 2011

Are today’s 20- and 30-year-olds less willing to take investment risk following the latest bear market and recession than their age group was in earlier times?

Some are, and some are not.

As stock prices have gone through wide swings in recent memory — with the Standard & Poor’s 500 Index plunging 57 percent from its all-time high of October 9, 2007 to the low of March 9, 2009 and then bouncing back nearly 100 percent — it’s understandable that young investors would have varied reactions.

Their views of market risk have depended not only on how much money they can afford to invest but also on the ways they invest: as employees in 401(k) defined contribution (DC) plans, individuals invested in IRAs, people investing outside tax-deferred accounts, “non-working” spouses self-employed and so on.

What’s more, opinions also could have depended increasingly on relatively new DC plan factors whose significant features may not yet be widely understood.

The importance of greater understanding was brought out at the recent annual meeting of the Investment Company Institute, when ICI Chairman Edward C. Bernard gave special attention to investors under 40 as he recalled recent ICI investor surveys’ findings that “across a wide spectrum of ages, investors have a reduced appetite for risk.”

“What’s particularly striking,” the T. Rowe Price Group vice-chairman says, “is that … Americans born in the 1970s — today’s 30-somethings … are less willing to take investment risk than their counterparts born in the 1960s … this group is shy about investing in stocks.” In 2010, the share of households headed by 30-somethings that own stocks was lower than in any other cohort born after the Great Depression, he noted.

A few days after he urged ICI members to help the younger generation understand the power of long-term investing “to overcome short-term setbacks and to outrun inflation over time,” a contrary impression of younger investors was conveyed by The Vanguard Group when, coincidentally, it issued an 11-page paper, Generations: Key drivers of investor behavior.

Vanguard’s survey — its first study of the generational differences in equities investing among participants in the retirement plans it administers — doesn’t only yield significant findings, but it offers reasons why differences may exist.

The thrust of the conclusions of co-authors John Ameriks, head of Vanguard’s investment counseling and research group, and Stephen P. Utkus, head of its center for retirement research: many in the younger generations have indeed accepted the risks always inherent in equities.

“While there is evidence that overall equity ownership among younger generations of U.S. investors has fallen in recent years,” they write, citing ICI data similar to those to which Bernard refers, “we find that, within DC plans, younger investors actually have higher equity allocations than (earlier investors) had at the same age.”

Why? There are two recent changes in plan and investment menu design resulting in major enhancements of employers’ 401(k)-type DC plans authorized under the Pension Protection Act (PPA) of 2006 and the Labor Department’s and Internal Revenue Service’s associated regulations.

They are:

Automatic enrollment of employees
Instead of still postponing enrollment in plans indefinitely, under PPA employees must opt out of participation or be enrolled, thus meeting Labor’s goal of increased enrollment. PPA also relieved employers of concerns about (a) legal liability for market fluctuation and (b) the unhelpful investment of employees’ contributions in low-risk, low-return “default” investments for workers who are many years from retirement.

Target-date funds as default options
For employees who become participants but can’t decide how to invest their contributions, more employers can and do offer target-date funds which satisfy Labor’s definition of “qualified default investment alternative:” a mixed asset-fund that is “appropriate as a single investment capable of meeting a worker’s long-term retirement savings needs.”

How do target-date funds satisfy the Labor Department’s requirements? By having a portfolio whose stocks/bonds/cash/mix takes into account an individual’s age or retirement year.

How does a sponsor do that? Usually, by choosing appropriate portfolio mixes for people retiring in, or around, every fifth year (2025, 2030, 2035, etc.) and bringing investors there from first investment to the year for which the fund is named by automatically reallocating assets (replacing stocks with bonds) regardless of markets, as fully disclosed in advance.

“These changes have led younger investors to behave differently than prior generations, who were more likely to invest conservatively and remain at these cautious allocations due to inertia,” Ameriks and Utkus write, adding a forecast: “Equity risk-taking by participants will be increasingly the result of plan design and menu choices, and less a function of participant reaction to current market conditions.”


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What a great article. As someone with a BA in economics and an MBA, too, I find little comfort in the stock market. It is a gambler’s domain wrought with misinformation and lies. And I was born in the 1960’s!

What’s truly disheartening is that my investment funds have proven no better than random guessing. An index fund would have done me so much better than my own educated guesses.

With all the SEC controls and such you would think we’d be getting something truthful out of the annual prospectus but smoke and mirrors prevail.

With what little money I have left to me, I find myself very short on retirement. One dot com bust, then the housing thing… Really, the best idea is to work for your money rather than trying to get your money to work for you, unless you have a lot.

There is a threshold where your money can work for you. The SEC defines it as a million dollars. Then you are a “qualified investor.” Short of that, you have to be lucky.

I’m not savvy enough to move my money around. Actually even with my economics degree, I’m not interested enough to keep checking the market’s mood several times a day. So I keep it in the same several funds and am slowly sanguinated by the fees.

I lean towards the idea of more regulation to bring a modicum of trust into the system. But I also recognize the blood thirsty nature of the greedy men who dominate this industry and realize that they’d just find another loophole to suck my money from me.

So if your aren’t satisfied with your wages, the plan has to be one of three choices: 1. be lucky, 2. be a shark, or 3. be an entreprenuer and make your own.

Posted by LEEDAP | Report as abusive

I never really had enough money to invest in things and even if I did I wouldn’t after what happened in 2008 with the recession. To hell with the stocks and investment companies. They seem like a rigged system where it’s easier to just not play and be happy with what little I have.

Posted by MightyMoo | Report as abusive

It destroys your credibility if you don’t know the difference between averse and “adverse”

Posted by clem1147 | Report as abusive

I working the retirement plan administration industry. Recently, my work assignments have changed to include monitoring and summarizing news reports on the various funds. There are a few things to realize when investing in “Equities”. Unless you know how to read financial statements, closely follow specific industries and economic trends like say Warren Buffet, you may be better off hiring someone to do that for you. The easiest way to do that is to buy a mutual fund.

The mistake I made in the past was to look at mutual funds as commodities. What your really buying (via sales charges and expense ratios) is the expertise of the fund manager OR management team. The prospectus may specify the TYPES OF ASSETS brought into a fund, but it cannot define THE SKILL OF THE MANAGER. IMHO a good manager will always always always have a value mentality. Even a growth oriented fund manager should know that paying too much for an asset is NEVER good for a portfolio.

If you know your allocation decision (diversified among various asset groupings or a simplified allocation fund), how do you ascertain a manager’s skill without a lot of difficult research? Here are my suggestions based on what I’ve witnessed in the past 2 years: 1) Start with a mutual rating agency that has a tool to identify highly rated funds. (The ratings have limitations so don’t stop there.) 2) Who is the manager? Is there a single manager or team? How long have the managers been on the job? Were they there in 2003 or 2008 when things got rocky? 3)Performance: These sites will display a performance graph comparing the fund to its peers. Is it volatile? Is it in the top 10% one year and scrapping bottom the next? How did the fund respond to the markets of 2003 and 2008? 4) Expense Ratios and sales charges: It’s easy to see why you would avoid a high sales charge but the expense ratio is a little more opaque. You don’t actually see it come out of the investment. It just slows down the earnings capacity in the background. Don’t get crazy obsessed here either. A cheap loser is still a loser. 5) Keep tabs on the manager. The great thing abbout RSS feeds is that you can specify them to notify you when a certain name (fund name or manager) appears in the news. 6) Have more than one plan. If you have 2 or more funds that meet your allocation comfort level, then you

Posted by JCnTN | Report as abusive

For the non-investment guru, mutual funds are the cheapest way to hire someone else’s expertise. So what you’re buying is the manager’s skill at managing the fund within the boundaries of the prospectus. Index funds are tempting but IMHO you can do better by looking at the manager or management team and their style.
Here’s my take on the subject for the Tax Deferred Account:
1) Define your allocation style: If you want to pick several funds that focus on specific sectors (sizes and growth vs value style) or specific industries (healthcare, utilities, commodities), then prepare to do more than a few hours of homework FOR EACH SECTOR. If that doesn’t appeal to you, then consider allocation products that seek to manage that balance for you.
2) How does the fund rate against others in the same category? This is easy to find on the internet but ratings alone do not guarantee success. They are still retrospective assessments.
3) What is the management setup (single manager or team) and how long have the players been running the fund? Were they there in difficult patches such as 2002 and 2008? Don’t assume, that the guy who was hired to replace a so-called “loser” will do any better in the next unstable market.
4) Performance: How did the fund perform in the difficult patches of 2002 and 2008? Did the fund recover in pace with the rest of the market? Is volatility the norm: Top dog today/ bottom feeder tomorrow or an unexciting albeit consistent mid-pack performer?
5) Avoid any sales charges and keep expense ratios below 1.5%. The pain of a sales charge is easy to spot. However, the expense ratio silently holds back the earnings potential of the fund.
6) Keep tabs on the manager, not the market. RSS feeds are now sophisticated enough to notify you of news events on fund names AND the the people who run them.
7) Having more than one fund can be a defacto backup plan. If your super cool fund manager of 12 years decides to retire or change jobs, you have a decision to make: A) play “wait and see” if the new manager completely unravels the previous success or B) transfer your assets to the other fund with which you are already familiar. Brand loyalty is a nice sentiment but only the brand benefits, not you.

This is really easier than it may sound. If you like a structured approach, write out each question and pick 20 no-load funds to review with the questions. You may not like any of the first 20, but you at least have a framework for a quick way to see if a manager has a successful history or not.

Posted by JCnTN | Report as abusive

Doesn’t matter if your risk adversive or not, expect to be trailed to your money, and hounded for it. As long as Institutions exist that live off retail inflows, you will be hunted, iether on the macro or microside, it’s about seperating you from your rewards. Always has been, always will be.

Posted by Chivelry | Report as abusive

The best thing you can do, it to become an active trader, and stop trusting your money to others. In particular the “Professionals” who either only make money in an up market or by “churning” an account. The key greater equity investment, in our young is education about trading. Become a student of money and training. My son age 20, has been trading credit spreads, since he was 17. To be the victor, not the victim.

Posted by jimfrancis | Report as abusive