For many young investors, the market’s only gone up
NEW YORK – Meet the generation of investors who haven’t known a bear market.
The U.S. stock market has been on the upswing for 91⁄2 years, during which a cohort of younger investors has never dealt with a 20 percent drop in the S&P 500 – the classic definition of a bear market. Such a decline has historically happened on average every four or five years.
That’s nice for these 20- and 30somethings, and their retirement accounts, but it raises the question: What will they do when the next downturn inevitably arrives? How they respond will be crucial because this generation bears a heavier responsibility for paying for its own retirement, as pensions go extinct and Social Security’s finances weaken.
Few analysts are predicting an imminent downturn for the S&P 500, which finished Tuesday within 0.8 percent of its record, but they’re much less confident about 2019 or beyond due to rising interest rates and other market challenges. The fear is that inexperienced investors will panic at their first taste of a bear market and sell their stocks, which would lock in their losses.
For young investors with decades to go before retirement, conventional wisdom says the best bet is to ride through and wait for a recovery. The average bear market brings a loss of nearly 40 percent for the S&P 500, but it typically lasts less than two years, according to S&P Dow Jones Indices.
Many experts say today’s young investors are generally taking the right approach. For instance, many are invested in the stock market through specialized kinds of mutual funds in their 401(k) accounts called target-date retirement funds, which may keep them from making rash moves.
Some younger investors also say the experience of their parents in the wrenching financial crisis of 2008-09, when the S&P 500 lost more than half its value, has prepared them for the next downturn. They know the stock market more than made up all those losses, eventually.
They’re investors like Marcus Harris, a 34-year-old physician in the Houston area who started investing about five years ago.
“It’s going to sound terrible, but I’m actually looking forward to the next downturn,” he said of the opportunity to buy stocks at a lower price. “I know it’s an overbought position right now, and I’m just sitting on my hands saying, ‘I can’t wait.’ Hopefully it will go to half the price, and I can gobble up a lot of it.”
He’s somewhat of an anomaly among his peers in that he owns stocks at all.
Only four in 10 households led by someone under 35 owned stocks in 2016, according to the most recent data from the Federal Reserve. Stubbornly low wages and high debt are keeping many younger workers out of the market.
Still, the ownership rate among younger households, at 41 percent, has been on the upswing and is much higher than the 23 percent rate in 1989.
Young people are much more likely to have their entire 401(k) in target-date funds than older savers, and the hope is that when the next downturn hits, young investors will continue to leave the investment decisions in their hands.