A recent Wall Street Journal titled “The Young and the Riskless” details how “twentysomethings” are not investing in stocks, but instead are putting their savings into less risky investments. The tag line on the article is:
Twentysomethings are seeking safety from market volatility at precisely the wrong moment in their investing lives. Here’s how to get back on track.
From the outset I was struck by the author’s presumptuous and scolding tone. I also like their strategic use of the word “volatility” instead of the more appropriate term of “losses” when describing market events over the twentysomething’s financially sentient lifetime, which would be something like the last 10-15 years.
Per the charts in the article
The percentage of young investors who say they’re willing to take above-average or substantial risk has declined from 52% in 1998 to 31% in 2011. 52% of investors in their 20’s who say they will “never feel comfortable in the stock market”. 33% of 20-somethings’ non-401(k) portfolios held in cash, versus 27% for all investors.
It is important to understand how “faith” in the market is typically defined in the popular financial press. Faith usually means putting your money in an index fund (or ETF), with low fees, continuing to do so regardless of market conditions, and relying on the belief that “in the long run” it will all turn out alright and you will be able to retire rich. The “financial calculators” have an assumed rate of return that you receive on your money, similar to the same calculators that public pension funds use, and they are typically “set” between 6% and 10%. Due to the “miracle of compounding returns” you can amass large sums of money in the future.
The problem with this mantra is that NO ONE has been winning with this strategy for a LONG time. What you see, instead, is that money put into the market is often battered immediately by volatility and is worth a fraction of what you put in only months prior. If you change jobs regularly (once every 2-3 years, as younger people often do) and are an avid 401(k) saver (which is recommended), many times when you pull out your money it will be valued far less than what you put in, or about even when the company match is taken into effect (depending on vesting). This can be demoralizing. I know that when I left companies in the late nineties and after the dot-com collapse I started putting more of my money into cash-like investment selections (despite warnings from my employers’ 401(k) educational materials) just because I hated moving balances worth a fraction of what I held back out of my pay when I left to start with a new company.
Also, in order to win “in the long run”, you have to stay with it in the short run. This means that when stocks plummet, you need to stay in the market and keep investing. If you decide to cut your losses and run, or stop putting new money in during market troughs, you don’t get the same benefits when the stocks rise later. This post I wrote basically said that no matter what you did in 2007, it turned out to be a loser, but if you bought during the trough in 2008 (or held throughout) you saw big gains later as the market turned back around (to where it was before). BUT if you didn’t stick with the markets, you didn’t benefit from these gains and ended up as a net loser. It is VERY HARD mentally to keep investing when markets are going down, but if you don’t buy low there is no way you can even conceptually win in the “long run”. If you bail, for sure you are going to fail, assuming you are following the mantra (which is what the WSJ article’s author was lamenting).
Kids see their parents’ struggles. Their parents have been believers in the markets, since the bear markets of the 70’s were replaced by the bull markets of the 80’s and 90’s. If you retired in the 90’s, after years of investing in the doldrums, you not only benefited from high interest rates which appeared to “goose” the compounding effect, but you also essentially did some great “market timing”, buying low and selling high. But the parents of today’s twentysomethings didn’t retire in the early 90’s, they kept working, and watched their investments suffer along. Now the parents’ are in a bind.
Not only did the markets get hit, but there isn’t really an underlying foundation of belief in WHY the market should do so great “in the long term”. In the past you could look at the track record of the US and show how we weathered recessions, panics and depressions, wars whether declared or un-declared, and always came out ahead. But today everything seems to be static or declining; our unemployment rate is high, we have high “real” inflation from commodity price increases (oil, food), and the cost of services like a college education or health care (if you can get insurance at all) is very difficult to bear. In order for the market to rise, the country needs to be productive, well run, and growing – does this seem to be today’s perception of American performance? This lack of an underlying narrative in why markets should rise of the long term (other than it has happened in the past), combined with the miserable ACTUAL performance during the last decade and a half, is killing confidence in the “long run” hypothesis that markets go up.
Another element of caution is that not only did stocks crater (or stay flat), but everything else fell apart too, in defiance of what the typical financial media said would occur. Housing became a miserable investment, rather than the guaranteed path to wealth that was painted in the press. Can’t you remember people saying that renting was “throwing your money away”? I remember having many, many people look at me in a dumbfounded fashion when I told them that I rented for over a decade when I could have easily bought. This thinking has obviously changed radically, despite record low interest rates (high rates would have made the housing problems unimaginably worse, at least in the short and medium term).
If kids travel, they can see how the “US Peso” doesn’t go far overseas. The dollars is worth a fraction of what it used to buy vs. the Euro, the Canadian dollar, the Australian dollar, or the Japanese Yen. The devaluation of the US dollar is another signal of our relative decline, along with our equity markets and housing markets.
The popular press’ scolding is going to fall on deaf ears until young adults see something out of their own experience that would convince them that stock investing is a winning strategy. The lack of anything except (comparatively) ancient charts of a world before the cell phone and the internet won’t sway them.
It really comes down to faith vs. experience. And among the young, experience is winning.
Generation X Addendum
This wasn’t mentioned in the article but a parallel trend I personally have noticed is that people of my generation (Gen X) are taking charge of their finances in their own way. Those with means tend to personally select stocks and get involved directly in their investing rather than “passively” investing through indexes (although ETF’s are part of their portfolio). While I am in the finance industry, many of my friends and acquaintances are not, but they have grown tired of bad and counter-intuitive advice and are taking matters into their own hands, in a variety of ways. Their particular strategies aren’t important – what is important is that they don’t believe the common wisdom and are taking responsibility for their own investment outcomes. In my opinion this is another manifestation of what the twentysomethings are doing, except by people with more assets to invest in the first place.
Cross posted at Trust Funds for Kids
11 thoughts on “Faith vs. Experience for Investing”
I “worked” my way through college by trading wheat and corn futures on the CBOT. It paid for 12 years of school, a BA, MA and MBA (I specialized in trading). Stocks and bonds are too risky. A portfolio filled with spreads and straddles requires a good deal of attention but it can provide a reliable income if one has small positions and avoids thin markets. I could of done better if cell phones had been invented back then.
-Look at who advertises in the WSJ.
-There are two issues here. One is whether stock investing makes sense. The other is whether dollar cost averaging makes sense. I don’t think dollar cost averaging ever made sense except for brokers and fund-mgmt companies. Stock investing may make sense if you know what you’re doing.
-The current investment environment is particularly difficult because interest rates are low, stock mkt averages aren’t going anywhere, residential real-estate isn’t what it used to be and there’s significant inflation.
Very good post, Carl. I agree with everything you said.
The way I look at it is that if investing in shares gave a high return with little risk, that would be a “free lunch”. And we all know they don’t really exist. To get higher returns you have to take more risks and who wants to take a risk with their life savings?
The benefit of investing in the stock market is that you’re riding the wave of wealth creation. As the country gets wealthier, thanks to the production of those evil, evil corporations, so do you. But the new wealth is only created at a finite rate and ultimately it’s a zero-sum game between investors. Then you also have short-term market volatility created by skittish investors or those trying to game the system and long-term volatility caused by the political environment.
I would only invest in shares if I felt I knew what I was doing and could pick winners. Here, our interest rates are not so screwed up and if you have a reasonable amount of money (say at least $10k) you can put it in the bank and get about 6% return with little risk. A good share trader can probably make 10%+ but with some risk. Is the extra few percent worth the extra risk? Not for me.
I think stock investing makes sense. It is just a risky business and it helps if you know what you are doing and understand what you are getting into.
The presumptuous tone of the article is what bothers me. The WSJ advertisers as you point out Jonathan have been peddling some advice that has been relatively ruinous over the last decade or so and they are losing the next generation of investors. Of course since the time horizon of these institutions is about 5 seconds with Europe imploding and Dodd Frank burdening them they could frankly care less.
I’d have to say that I can’t think of any more useless folks than the popular financial press. They are wrong to an astounding degree but seem to learn nothing from the experience. Doesn’t mean that there aren’t lots of smart people out there – but they aren’t in the popular press.
Agreed, stock market investing makes sense and it is an important part of any economy. I just don’t think it’s for everyone and I certainly don’t think you can treat it as a black box where money goes in and profits come back (which is how fund managers would like you to think of it).
Nickolas, where are the banks paying 6%, on what deposits?
I forget where I read this – and the exact percentages – but it came down to if a guy in is 20s would invest – say – 10% of his income monthly by retirement time he would (or should) be a multi millionaire. In today’s dollars.
You just have to have the discipline to “pay yourself first”.
The latest news – would tend to dissuade people from investing in the market but buying blue chip stocks – and holding onto them – has over the decades proven a solid strategy.
An additional problem to the mix of the stock market failing is the devaluation of the dollar and the looming crash.
I suppose that blue chip stocks will have been wise investments if things get better. If things stay pretty much static, the doldrums, BC chips will only seem mediocre at best. If things get bad BC stocks will look good. If things get worse, say zombie apocalypse bad, BC stocks will seem like terrible investments. So, all things being about equally probable, BC stocks are a good bet!
The free money to the financial institutions directly competes with monies that bid for stocks. The increasing supply of free money is driving the price of stocks up and the value received by the investor down. As others have said before here, the fed monetary policy is a stealth tax on producing consumers.
Tyouth : Australia. Which is possibly why our currency is strong against the USD at the moment.
‘the looming crash’?
There’s been a crash looming my entire life. According to someone anyway.
Comments are closed.