Generational shift: Changing investment habits

12th January 2012

They're encountering a lost decade, and one that's going a long way towards putting them off taking a punt on the stock market. Coming of age during a disastrous decade is shaping a new generation of investors, and they're likely to shun equities when they have the spare cash to set aside.

Of course, a sudden bull market would soon see these youngsters forgetting about the gloom of previous years…

…so should they be holding their nerve?

This is personal preference – and depends on the amount of capital they hold, and tolerance to risk. If a robust recovery takes place, many might increase their risk appetite, but this could be some way off.

While older investors can look back to earlier periods of sustained growth to reassure themselves that stocks are likely to deliver stellar returns over the long-term, younger investors don't yet have this insight. Those of us who've entered the market over the past few years have only known disappointment.

Consider the psychology

This anti-market reaction to the financial collapse has a psychological basis. But opting for what we believe to be ‘safe' may be a fool's game.

Kim Stephenson, Mindful Money's resident psychologist, says: "Everything is risky (the equivalent of House's mantra, "everybody lies").  Everything that is uncertain (which means everything in life) can turn out in different ways, so there is a risk that it will, for an individual, turn out badly. So markets are risky, property is risky, going out is risky (you might be hit by space debris), staying in bed is risky (you might die in a tea cosy related accident), life is so risky you won't get out alive.  The secret, in my view, is to look for balance and diversification, not chase the "sure thing" because it doesn't exist and there is risk inherent in everything. "

"People react to perceived threats in predictable ways – generally fight or flight. The problem for us nowadays is that the perceptions we evolved over millennia aren't much use now, and our perceptions are what tell us what is a threat. We're geared to fear some things, the dark, spiders etc – we only have to see a parent scared of those once to be scared ourselves, although in the UK they're not dangerous. Toasters are dangerous (more people are killed by them than spiders) but we're not set up to fear them.  

"So, how do we interpret the Eurozone crisis, what does it mean for us, what threat does it pose to us, how will it affect us – it isn't pre-programmed like a cliff edge?  So if we decide to avoid something that has scared us, like a market crash, we're deciding for ourselves to treat it as a threat to run away from.  It seems to me that that would mean always running, which reduces the options for balance in investing.  I'd suggest it is more useful to decide to fight in some circumstances, not by committing everything to the market (which is just gambling on winning this one fight) but by balancing out investments and diversifying, so that whatever happens we might have some scary things (like losses) and some pleasant things (like gains), but that we win overall by winning enough battles we've chosen to fight."

What happened during previous crises?

If the under-35 crowd turns out to be anything like the folks who came of age during the Great Depression, the current bias against stocks could be long lasting, reports CNN.

The report says: "A study last year examining the effects of major economic events on financial risk taking found that people who grew up in the 1930s were nearly three times less likely to invest in stocks than those who reached adulthood in better times.

"And when they did invest, they put a smaller fraction of their money into the market. That held true well into their forties, 20 to 30 years after the Depression had ended."

Of course, many in ‘Generation Y' have yet to amass enough of a deposit to buy their first property – let alone consider long-term stock market investments. Some say we're set to become a ‘nation of renters', such as the Halifax report that says two-thirds of young people without their own home believe they have no prospect of getting on the property ladder.

However, The Reformed Broker says: "I think Gen Y will probably fall in love with stocks one day just as their parents did once the brutal secular bear market of the 1970's gave way to the rampaging secular bull market that began in the early 1980's.  But we are not yet at that moment and I believe the distrust of investing will stick around for Gen Y a while longer.

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