How the financial crisis is still affecting investors

"I knew the market was down, I knew the stock price was going down like a pebble, but it 's only when Lehman crashed that I realized how much money I got. Money was gone, "says John Bunting, a 33-year-old Philadelphia housing entrepreneur who says the value of his investments has fallen by 50% during the crisis.

In September 2008, he was still in his early twenties and had less than $ 50,000 invested. However, the experience has changed his investor behavior for years, forcing him to ignore several potential investments.

Bunting is not alone. A crisis that threatened the global financial system would inevitably affect investors for years and there is substantial evidence of this. In the years that followed, Americans sought to save money and fight debts.

They were also suspicious of stocks. In 2007, 65% of Americans owned shares, according to a Gallup poll. In that year, that number had dropped to 55%.

The scars lasted although the stock market has since reached new heights. Throughout the nine-year bull market, which recovered all the crash losses and added an additional 82%, the crash continued to resonate. Stocks are still climbing on a "wall of worry," even as worries shift from the European debt crisis to closing the government to a trade war.

"When I sit with clients today, they say," I can not emotionally handle another situation in 2008, "says Jeff Carbone, managing partner of Cornerstone Wealth in Charlotte, North Carolina. as well as the good.

For many Americans, market gains have simply not been emotionally significant. Of the 2,000 people who recently responded to a survey commissioned by robo-sur-conseil Betterment, 48% thought the stock market had not increased at all in the last 10 years, while 18% stated that he had fallen.

"People who do not save or invest do not know they have missed returns by 200% in the last decade," says Dan Egan, Behavioral Finance Director at Betterment. "They will probably continue to not save and invest in the future."

Studies of investor behavior have shown that economic crises generally have lasting effects. Adolescents and adults in the Great Depression were half as likely as young adults during the post-war boom to invest money in equities throughout their lives. by researchers from Berkeley and Stanford.

Adults who reached adulthood right after the recession of the early 1970s also avoided the stocks. The experience of economic events has a greater impact on investment behavior than "historical facts derived from information summarized in books and other sources," the study says.

Or, as boxer Mike Tyson once said, "Everyone has a plan until he's hit in the mouth."

There is evidence that history is repeating itself today, with the crash of 2008 creating another "lost generation" of equity investors. Millennials have graduated from a miserable job market with a crushing burden of student debt. Those with economies have seen it disappear quickly. The Wall Street merchants, it seems, had cheated their parents in over-indebted and over-valued homes. In the years that followed, young people flirted with other types of investments, including cryptocurrencies. Stocks, not so much.

According to Gallup, an average of only 31% of 18- to 29-year-olds held shares from 2009 to 2017, compared to 42% in this age cohort from 2001 to 2008.

Other generations were also less likely to own shares, although the oldest group (65 years and older) increased their shareholding over this period.

"I think younger people are more hesitant to invest than older people," says Jamie Cox, managing partner of Harris Financial Group, a Richmond-based consulting firm that primarily manages funds for blue-collar workers in the region. "Your behavior is shaped early in your career."

A Legg Mason survey conducted last year showed that 82% of Millennials said their investment decisions were influenced by the crisis, compared to only 13% of baby boomers. The survey reveals that Generation Y members are more likely than other generations to accumulate cash instead of investing them. Young people are also less likely to start their own business, a trend that could contribute to the shortage of new businesses in recent years.

However, it is not so easy to draw radical conclusions about the psychology and behavior of investors, especially when researchers are trying to group a diverse generation.

While some young people may have turned away from stocks, those who have continued to invest are hard to categorize. Thomas De Luca and Jean Young, research analysts at Vanguard's Center for Investor Research, recently analyzed data from four million households investing with Vanguard and found that young investors were falling in different camps. Most millennials – those born between 1980 and 2000 – have aggressive allocations, millennia investing about 90% of their money in equities, at the median. This is exactly the kind of growth-oriented allocation that most fund managers recommend to young people who are saving for their retirement.

Yet at least a quarter of Vanguard's millennial investors were unusually opposed to risk. The shy ones tend to be the ones who started investing after the crisis. Of Generation Y members who invested for the first time after 2008, 22% chose portfolios without any share. Of those who invested before 2008, only 10% completely abandoned their stocks.

The difference may be related to how the financial crisis affected each group. Egan of Betterment says that millennials who were employed and had already started investing would likely stay in the market. Those who felt that the recession had a more direct economic impact were less likely to invest in stocks – even years later.

"The people who were hit hardest left college in 2009 or 2010," says Egan. "The economy was shrinking and they started with a lower wage or had trouble finding a job. It's a hangover that affects people since the crisis. "

Skepticism about the market since the crisis is not found among young people. Some older investors have also changed their strategies, often in unpredictable ways.

"I'm not in the market in the long run and I'll be out soon," says Karen Kunz, 63, associate professor at the University of West Virginia. "If I stay all summer, it's already too long. I have money available and investments in metals and cryptography because I think that they are a good alternative to the stock market.

However, investment models are not all determined by psychology. Retail investment strategies have been shaped since the recession by technology, new rules and new products.

The most significant change in the market over the last decade is the shift to passive and low-cost investment. An article published in 2015 by the Young of Vanguard Investor Research Center referred to millennials as "automatic savings generation", with reference to investment products and index funds "set-it-and- forget-it ". This change was stimulated by the Pension Protection Act of 2006, which encouraged employers to automatically enroll their employees in retirement savings plans formed by companies such as Vanguard and Fidelity. Half of Fidelity's 401 (k) accounts are now fully invested in target date funds, up from 14% in 2008.

This change is driven by younger investors, who are more likely to be enrolled in target date funds by their employers. Vanguard found that the 2013 millennials were twice as likely as the first boomers to have professionally managed portfolios, mainly because of the cut-off date. This means that they rarely make conscious decisions about their portfolios and are less likely to play with their holdings as markets change.

It is not entirely clear if it is "because they trust [the products], or if the inertia only works in a positive way, "says Katie Taylor, a Fidelity executive who helps identify retirement trends.

In both cases, she is pleased with the results, as it means that young workers who have remained in the market since the crisis develop healthy habits and are less likely to make the mistake of withdrawing all their money from the market when it falls back. . "People are much more appropriate for their age and time horizon than they have been in the past," she says.

Since most people do not use diversified accounts that rebalance throughout their lives, retail investors are less likely to put their eggs in one basket. A decreasing number contains so-called "extreme" portfolios: either 100% shares or zero. Fewer still invest heavily in the actions of their employer, a trend that has burned down previous generations.

New investment products and the performance of gangbusters in equity markets have also contributed to another trend since the crisis. People who are still investing tend to position themselves more aggressively than they were before. In 2018, 47% of the assets of Fidelity's 19.7 million retail brokerage accounts were held in aggressive portfolios, defined as accounts with at least 85% exposure to equities. In 2008, this number was 40%. Change has occurred in every cohort, from baby boomers to millennia and among women and men.

Indeed, the fear of losing has been replaced by the fear of missing. Bunting, the real estate entrepreneur in Pennsylvania, says he continues to decide not to invest in Square's initial public offering in 2015 because he was too scared. (Square has increased tenfold since.)

He hopes he will not let fear guide his decisions in the future. "If it happens now", he plans to remember that "yes, you will lose value, but you lose only value, you do not lose real money".

"Looking back, I would have bought more."

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Write to Avi Salzman at [email protected]