You may know someone—you may even be someone—who fled the stock market in late 2008 or early 2009, judging it unfit for retirement savings. An AARP market survey in 2008 found that 45 percent of people nearest retirement—those between the ages of 55 and 64—said they reduced exposure to risky assets as a consequence of the stock market collapse.
Now, with the Dow Jones Industrial Average moving close to the 11,000 mark, I got to wondering whether our recent experience with the market’s downside has made us permanently risk averse as investors—especially when it comes to retirement savings. Going forward, will we stay away from stocks, reducing the number of potential buyers and contributing to downward pressure on prices for years to come?
My guess was that the flight from risk was as fleeting as our newfound love of savings appears to have been. As you may recall, before the economic downturn, Americans barely saved at all. But as the economy collapsed around us, we turned into believers, pushing the personal savings rate up to 5 percent in the second quarter of 2009. Now, with the economy improving, the savings rate is declining. It was 3.4 percent in January and 3.1 percent in February.
Connection to Age
The answer to whether we will go back to embracing market risk seems to be connected to age. In a 2009 survey, the mutual fund trade group Investment Company Institute found that among the younger-than-35 crowd, 22 percent were willing to take above average or substantial risk. For those ages 35 to 49, it was 26 percent. For those ages 50 to 64, it dropped to 19 percent and beyond that to 8 percent.
Call it the wisdom of the ages. Changing levels of risk tolerance make sense: If you’re young and the market takes a serious dive, you have time to recover. If you’re retired, you may not.
Brian Reid, chief economist for ICI, said that for the time being investors on average appear to be about as risk averse as they were in the late 1980s, after a series of bear markets and the market crash of 1987.
The tolerance for risk peaked in the last part of the 1990s as the tech bubble was approaching its pre-bursting height. After the bubble ended, tolerance for risk declined again, then leveled off and then ticked up slightly, he said.
Now, despite the substantial upturn in the stock market—the Dow Jones Industrial Average has rebounded from a low of 6,626.94 on March 6, 2009, to a close of 10,670 on April 6 this year—Reid said that there have been “weaker inflows into stock funds than we have seen during previous upturns for the last 20 years.”
But some investors do have a renewed appetite for risk, said Christopher Brown of Ivy League Financial Advisers in Rockville, Md. Compared with how they felt 18 months ago, “people are pretty convinced that the financial world is not going to collapse,” he said. Brown said many clients are beginning to return to the stock market because of low returns on more conservative investments and because the market has been on a good ride recently: “Investors’ memories seem to go back six months. They think tomorrow is going to be like yesterday.”
Riding Out the Decline
Last year, when the market was at its worst, that mentality often made it hard for financial advisers to persuade investors to ride out the decline rather than get out. “My colleagues and I get together,” Brown said, “and say the greatest value we added was to keep investors in the market” as it shot downward.
According to research by the mutual fund company Vanguard, from September 2007 through December 2009 only 3 percent of participants abandoned stocks altogether. Another 42 percent changed the portion of their portfolio invested in stocks by 10 percentage points or less.