Many young investors have never seen a stock market dip
How they deal with the inevitable declines is critical for their financial futures
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 nine and a half years, during which a cohort of younger investors has never dealt with a 20 per cent 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 30-somethings, and their retirement accounts, but it raises the question: What will they do when the next downturn inevitably arrives?
How young investors respond will be crucial because this generation bears a heavier responsibility for paying for their 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 per cent 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 per cent 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 2008-2009, 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.
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. Low wages and high debt are keeping many younger workers out of the stock market.
Still, the ownership rate among younger households, at 41 per cent, has been on the upswing and is much higher than the 23 per cent rate in1989. Since then, the only time young investors were much more likely to own stocks was around the dot-com bubble.
“All the ones I know, they do want to get involved,” said Kimelah Taylor, a 36-year-old accounting adviser in Houston who began investing with a financial adviser about four and a half years ago. “There is that delay in when they get involved because they’re paying off student loans and other things.”
Some younger investors may also be in the market without even realizing it. More employers are automatically enrolling their workers into 401(k) accounts, and many of those have a target-date retirement fund as the default investment.
These funds automatically change over time and create a portfolio that’s appropriate for an investor’s age. When the tar- get retirement year is decades away, they’re virtually entirely in stocks. As retirement approaches, they shed some stocks for bonds and other safer investments.
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.
“Inertia in this case is working for them,” said Jeanne Thompson, senior vice-president at Fidelity Investments. “In many cases, that inertia will help when there is a market downturn, and they’ll probably leave their assets and stay the course.”
“The main reason young people are not running away from stocks is they aren’t figuring it out for themselves,” said Jean Young, senior research associate for the Vanguard Center for Investor Research.
If anything, market dips have only emboldened some, said Charles Adi, financial adviser at Blueprint 360 in Houston. During a tumble earlier this year, for example, he was balancing calls from older clients looking for reassurance with younger clients hungry to buy more shares of stock.
Still, there is the threat of overconfidence, said Danny Alexander, a financial coach at Stangier Wealth Management in Portland, Ore.“But until they’ve been in a fight and punched in the mouth, they don’t know how they’ll respond.”